For vibrant, competitive internet businesses, look to emerging markets

December 4, 2021

A BEFORE DECADE, the relentless expansion of the American internet giants promised world domination. With their huge home market allowing them economies of scale, companies like Amazon, PayPal, and Uber seem destined to monopolize the screens of everyone from California charmers to Kalahari farmers.

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Today America still rules the global technology industry, in its broadest sense, which accounts for 71% of the market value of publicly traded companies. Yet a different pattern has emerged in that part of the technology industry that focuses on the delivery of Internet services to consumers. Here the activity is more dispersed and less American. This trend was underscored this year by a spate of IPOs by emerging market internet companies.

Instead of a few monoliths, three different business categories have emerged. Using a taxonomy first created by Asia Partners, an investment company, you can define the first group as global platforms. These still dominate in services that require minimal physical presence, especially search, social media, and cloud computing. Giants like Alphabet and Facebook (now Meta) generate slightly more than half of their sales outside of America and are among the most international companies in the technology sector.

A second category has become important in some places: the protected national champion. China's tech giants are eager to expand overseas, but their profitable home markets are largely sealed off from international competition and subject to increasingly stringent directives from their own governments. This protected technology model is also becoming popular in other authoritarian countries. Russia has favored domestic e-commerce and fintech companies and cracked down on the activities of Silicon Valley firms over the past year.

The third digital type - local heroes - is widespread in much of the world. In Asia and Latin America, local and regional companies often rule e-commerce, gaming, digital payments, ride-hailing, food delivery, and other app-based services. Examples from Southeast Asia are Sea, Grab and GoTo; South Korea has cocoa and coupang; and Argentina has MercadoLibre. In India, giants like Reliance and Tata are aiming to promote super apps that offer a range of services while specialists like Zomato, a delivery company, are upgrading.

Typically these companies operate in markets where it makes sense to be local or where local tastes count. In Southeast Asia, the supply chains are highly decentralized, which rewards this knowledge. In the fintech sector, regulatory differences make it difficult for international corporations to be successful. Activity is booming. India's Unified Payments Interface, a system that connects banks and non-banks to make cheap and instant payments, recorded approximately $ 100 billion in transactions in October, more than four times the same month two years ago. Mynt, a startup offering mobile payments and lending, has just become the Philippines' first unicorn, meaning it's worth over $ 1 billion.

These companies have been helped by an increase in capital availability, especially as global investors seek alternatives to China, where President Xi Jinping's technical crackdown will result in lower profits. Of the $ 342 billion spent so far this year on acquiring technology companies in emerging markets, 71% came from economies outside of China, the highest proportion in eleven years. Tech companies from emerging markets outside of China have spent $ 53 billion in the stock markets so far in 2021, more than double the previous record. Venture capital firms that were once focused on America, and perhaps China, are combing the planet in search of startups.

The third type of internet business is doing well. They encourage competition and are innovative in solving local problems such as mapping cities with no registered property. In contrast to American and Chinese companies, they bring little to no geopolitical baggage with them and form clusters of software developers and experienced investors around the world who may found another generation of startups. Local pension funds no longer have to put money on Wall Street to enter the digital economy.

There are inevitably risks. Some countries may be tempted to protect their local heroes from competition or to limit the extent to which outsiders can disrupt their own interests at home. Local expertise cannot travel well. The capital markets can be unforgiving - the share prices of the Indian payment company Paytm plummeted after a botched listing last month - and rising interest rates will make capital more expensive. When capital supplies dry up, groups that are still struggling to make money could run into trouble.

Even so, the likelihood of a global army of smartphone users all tapping identical apps on their screen has decreased. Instead, diversity should flourish, and that is to be welcomed. ■

This article appeared in the Leaders section of the print edition under the heading "Local Heroes"

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