The Road to Global Readiness

Why companies in developing nations need to hone their skills against local rivals

How can Mexico compete globally? — Adolfo Navarro, Monterrey, Mexico

Your question says "Mexico," but put any developing nation, from Turkey to Brazil, in its place, and our answer is the same. First, we'd state what you may already know: that countries whose businesses are trying to gain a foothold abroad need an educated workforce, affordable sources of energy, and supportive trade policies. But right out of the gate, we'd add another factor that is, in our view, equally important. The businesses that will compete most effectively in a fierce global economy will be those that have benefited from intense competition at home.

Think of it this way: No speed skater or pole-vaulter heads to the Olympics before years of intense competition with the hotshots in his own backyard. The same goes for companies heading into the business "world games." First, they need to train and prove themselves against hometown rivals.

Make sense? Sure. But it still doesn't happen enough. Your own country is a good example. Its economy became "free" in 1994 when the government essentially stopped allowing (some would say anointing) companies to control entire industrial sectors. But 14 years later, conglomerates still dominate, meaning too few entrepreneurial ventures have been able to emerge and deliver the critical lessons about agility and innovation that only they can. Yes, there are exceptions: Cemex (CX), the cement producer, and Grupo Bimbo, the food manufacturer, among others, are companies that grew at home and now thrive in foreign markets. But Mexico remains a country with too little local competition, which puts those "unconditioned" companies back on their heels as they enter the global ring.

By contrast, both Japan and South Korea sent their companies into the world economy swinging. In the 1970s, Japan's government encouraged its zaibatsu to reform and compete locally before setting their sites on foreign foes. Then they landed resounding blows, most notably against U.S. electronics, automotive, and steel interests. A decade later, Korea unleashed its chaebol with similar results, as companies like Daewoo and Samsung entered the global markets with productivity levels that quickly made them formidable rivals. Although China still has a largely state-controlled economy, its entrepreneurs have long been irrepressible. When GE (GE) bought a light bulb factory in Shanghai in the '90s, for instance, Siemens (SI) and Philips (PHG) were the main concern. But within a year or two, scores of Chinese startups acquired bulb-making equipment from Eastern Europe, and a slugfest ensued. No wonder so many Chinese companies enter the global market loaded for bear. They've been practicing.

So what is Mexico to do? If we're right about local competition being a prerequisite for global success, the government obviously needs to encourage it, or at least allow it. That seems to be what's now going on in India. Its economy began liberalization efforts in the '90s, but since 2000 they seem to be accelerating. New technologies have helped. One young company with an exciting business model—Airtel—has been able to compete fiercely in the cellular phone market with mainstays Tata (TTM) and Reliance Communications. For all three companies, the innovations sparked by competition have driven growth and profitability, and provided the ability and confidence to expand overseas.

The power of local competition is not, incidentally, just relevant to developing nations. If only! In the U.S., established semiconductor and biotechnology companies are constantly pushed to new heights by feisty upstarts. This happens in mature businesses, too. Case in point is business news channel CNBC (GE). It had no real rival for years, until Rupert Murdoch, a tough competitor, announced that he would launch the Fox Business Network (NWS). Almost overnight, CNBC looked like a new place, with reenergized anchors, bolder programming, and a revamped Web site. Fox won't stop coming at CNBC, of course, but both organizations will be better for the fight.

Look, no normal person seeks competition. It makes everything harder. But it also creates excellence and verve—in a word, edge. And you don't want to leave home without that.

    Before it's here, it's on the Bloomberg Terminal.