DEVELOPMENT economists over the ages have puzzled over why some emerging economies perform much better than others over the long term. We have been looking at the same issue in our latest research, and find one element that others haven’t tended to focus on: the often intense competitive dynamics that can be found in the best-performing emerging economies. That finding may seem counterintuitive: Don’t many emerging economies nurture and shield their national champions from competition? The short answer we find from our research is: No.
We looked at 71 emerging economies and identified 18 that achieved rapid and consistent GDP growth over the past 50 and 20 years. When we examined their track record more closely, we found that these 18 “outperformer” countries had twice as many large firms with revenues exceeding $500 million as their peers, relative to the size of their economies. More large companies means the gains are distributed more broadly than would be the case with just a few—but that domestic competition can be ferocious. Indeed, it is much harder for this plethora of emerging-market firms in the outperforming countries to get to the top and then stay there.
The top-performing emerging-market firms innovate more aggressively than their advanced economy rivals: 56 percent of their revenue comes from new products and services, compared with 48 percent for firms in advanced economies.
There are some clear lessons here for all economies, not just emerging ones. Allowing and indeed encouraging domestic competition brings results not just for the firms that survive it, but also for the economy as a whole.
In outperforming emerging economies, policy-makers work with the private sector to define the development agenda, and they also rationalize regulations and barriers to growth. Yes, some governments do give financial and other support to young companies, with the goal of helping them grow. However, where they have done so most successfully, the support is time-bound and targeted.
For most outperformers, we found that long-term growth was overwhelmingly driven by productivity growth within individual sectors rather than from the mix across sectors. In other words, success depends less on finding the right mix of sectors than on identifying sources of competitive advantage, and continuously driving productivity improvements within those sectors. The finding is yet another sign that competitive dynamics are essential — and that countries that get them right prosper.
Jonathan Woetzel is a director at the McKinsey Global Institute. Anu Madgavkar is a partner with the McKinsey Global Institute. James Manyika is the San Francisco-based director of the McKinsey Global Institute.