For dynamic and competitive internet businesses, look for emerging markets
A A DECADE BEFORE the relentless expansion of the American Internet giants promised world domination. With their vast domestic market offering them economies of scale, Amazon, PayPal and Uber seemed destined to monopolize the screens of everyone from California charmers to Kalahari farmers.
Today America still leads the global tech industry, at large, accounting for 71% of the market value of listed companies. Nonetheless, a different pattern has emerged in the part of the tech industry that focuses on providing Internet services to consumers. Here, the activity is more dispersed and less American. The trend was underscored this year by a rush for IPOs from emerging market internet companies.
Instead of a few monoliths, three different categories of businesses have formed. Using a taxonomy originally established by Asia Partners, an investment firm, you can define the first group as the global platforms. These still dominate in services where minimal physical presence is required, especially search, social media, and cloud computing. Giants like Alphabet and Facebook (now Meta) generate just over half of their sales outside the United States and are among the most international tech companies.
A second category has become important in some places: the protected national champion. China’s tech giants are keen to expand overseas, but their profitable domestic markets are largely closed to international competition and subject to increasingly stringent guidelines from their own government. This protected technological model is becoming popular in other authoritarian countries. Russia has favored local businesses in e-commerce and fintech, and last year cracked down on business activity in Silicon Valley.
The third digital type, local heroes, is prevalent across much of the rest of the world. In Asia and Latin America, local and regional businesses often dominate in e-commerce, gaming, digital payments, ridesharing, food delivery, and other app-based services. Examples from Southeast Asia include Sea, Grab, and GoTo; South Korea has Kakao and Coupang; and Argentina has MercadoLibre. In India, giants like Reliance and Tata aim to promote super-apps that provide a range of services, even as specialists like Zomato, a delivery company, grow.
Typically, these companies operate in markets where it is useful to be in the field, or where local tastes take precedence. In Southeast Asia, supply chains are highly decentralized, which rewards this knowledge. In fintech, regulatory differences make it more difficult for international groups to prosper. The activity is booming. India’s Unified Payments Interface, a system that connects banks and non-banks to make immediate and cheap payments, recorded about $ 100 billion in transactions in October, more than four times the amount of same month two years ago. Mynt, a startup that offers mobile payments and loans, just became the very first unicorn of the Philippines, which means it’s valued at over $ 1 billion.
These companies have been aided by an increase in the availability of capital, especially as global investors seek alternatives to China, where President Xi Jinping’s technological crackdown will translate into lower profits. Of the $ 342 billion spent on takeovers of emerging market tech companies so far this year, 71% has come from economies outside of China, the highest share in 11 years. Tech companies in emerging markets outside of China have issued $ 53 billion in the stock markets so far in 2021, more than double the previous record. Venture capital firms that once focused on America, and perhaps China, are scouring the globe for startups.
The success of the third type of Internet business is encouraging. They stimulate competition and innovate to solve local problems, such as mapping towns without registered property. Unlike US and Chinese companies, they have little to no geopolitical background and are creating clusters of seasoned software developers and investors around the world that could create another generation of startups. Local pension funds no longer have to invest money in Wall Street to gain exposure to the digital economy.
Obviously, there are risks. Some countries may be tempted to shield their local heroes from competition or limit the extent to which outsiders can disrupt vested interests at home. Local expertise may not travel well. Capital markets can be cutthroat – share prices of Paytm, a payments company in India, fell after a botched listing last month – and rising interest rates will make capital more expensive. When the supply of capital dries up, groups that still struggle to make money could be in trouble.
Even so, the chances have diminished that a global army of smartphone users are all using the same set of apps on their screens. Rather, the variety should flourish, and this is to be commended. ■
This article appeared in the Leaders section of the print edition under the title “Local Heroes”