As economic globalization has brought down trade and investment barriers and has connected far-flung countries in integrated global supply chains–and emerging markets seem to be converging with the world’s “rich industrial countries”–distinguishing these economies from developed markets may seem to matter less than before. We disagree.

One fundamental premise of this book is that businesses still need to distinguish emerging markets–collectively from developed markets and individually from each other.

But what, really, is an emerging market? The term emerging markets was coined by economists at the International Finance Corporation (IFC) in 1981, when the group was promoting the first mutual fund investments in developing countries. Since then, references to emergingmarkets have become ubiquitous in the media, foreign policy and tradedebates, investment fund prospectuses and multinationals’ annualreports, but definitions of the term vary widely.

The term is often reduced to the unhelpful tautology that emerging markets are “emerging” because they have not “emerged.” To understand emerging markets, we need to consider carefully the ways in which they are emerging and the extent to which they are genuine markets.

If you ask a conference room full of business executives how they would distinguish emerging markets from developed economies, variants of three stories will likely arise. Emerging markets such as Brazil, China, India and Russia, some will certainly say, are emerging by virtue of their recent fast economic growth.

The opening of these large economies to global capital, technology, and talent over the past two decades has fundamentally changed their economic and business environments. As a result, the GDP growth rates of these countries have dramatically outpaced those of more developed economies, lifting millions out of poverty and creating new middle classes–and vast new markets for consumer products and services. Large, low-cost and increasingly educated labor pools, meanwhile, give these markets tremendous competitive advantage in production, and information technology is enabling companies to exploit labor in these markets in unique ways.

Other executives will focus on emerging markets as emerging competitors. On the macro level, a landmark Goldman Sachs report published in 2003 forecast that the economies of Brazil, China, India and Russia could grow to be collectively larger than the G-6 economies (United States, Japan, United Kingdom, Germany, France and Italy) in U.S. dollar terms before the middle of the twenty-first century.

Commentator Fareed Zakaria sees this “rise of the rest” as a transformative, tectonic shift in the distribution of global power. Companies based in these economies, meanwhile, are already challenging multinationals based in the developed world–and not only in their home emerging markets. China-based Lenovo ‘s purchase of IBM ‘s personal computer business in 2004 and the acquisition of Jaguar and Land Rover by India’s Tata Motors in 2008 are only two examples of the increasing global mergers and acquisitions activity by emerging market-based firms. Some observers see the financial crisis of 2008–2009 as an inflection point, accelerating the emergence of these markets as dominant players in the global economy.

A deeper discussion might elicit a list of the persistent headaches of doing business in emerging markets. These markets, the executives might say, are prone to financial crises. Intellectual property rights are insecure. Navigating government bureaucracies can be thorny. Product quality is unreliable. Local talent is insufficient to staff operations. Reliably assessing customer credit is difficult. Overcoming impediments to distribution can be frustrating. Sorting through investment opportunities or performing due diligence on potential partners is often a guessing game. Others might throw up their hands and say that corruption is so endemic in emerging markets that the risks simply outweigh the potential rewards.

Based on many of these signs of emergence, some might say, emerging markets are not distinctly different from other markets; rather, they are simply starting from a lower base and rapidly catching up. Indicators such as the growing numbers of emerging market-based companies listed on the New York Stock Exchange or the growing ranks of billionaires from emerging markets listed annually by Forbes illustrate this trend.

Behind those indicators, however, is a more complicated story of why firms based in these economies have sought out overseas listings and how those moguls have amassed fortunes in developing countries that are, by many standards, still quite poor.

All these criteria–the indicators of opportunity and the causes for complaint–are important features of many emerging markets, but they do not delineate the underlying characteristics that predispose an economy to be emerging, nor are they particularly helpful for businesses that seek to address the consequences of emerging market conditions. We see these features of emerging markets as symptoms of underlying market structures that share common, important, and persistent differences from those in developed economies.

A fundamental premise of our work is that emerging markets reflect those transactional arenas where buyers and sellers are not easily or efficiently able to come together. Ideally, every economy would provide a range of institutions to facilitate the functioning of markets, but developing countries fall short in a number of ways. These institutional voidsmake a market “emerging” and are a prime source of the higher transaction costs and operating challenges in these markets.

By relying on outcome criteria to assess markets, managers often overlook the ways in which emerging markets operate differently than do developed economies. Ranking the world’s economies by per capita gross domestic product would suggest that the United Arab Emirates, for example, is among the world’s most developed economies, but it is an emerging market nonetheless because of its market structure.

Intuitively, managers know that operating a business in an emerging market is different from doing so in a developed economy. It is tempting to chalk up these differences simply to country context. Indeed, market structures are the products of idiosyncratic historical, political, legal, economic and cultural forces within any country.

By developing a granular understanding of the underlying market structure of emerging economies–and not only cataloging symptoms to be incorporated in an overall risk assessment–companies can tailor their strategies and execution in emerging markets to avoid mistakes and outcompete rivals.

Tarun Khanna is Jorge Paulo Lemann professor at Harvard Business School. Krishna G. Palepu is senior associate dean for International Development at Harvard Business School.

Excerpted with permission from Harvard Business Press. From Winning in Emerging Markets: A Road Map for Strategy and Execution

For all the latest headlines visit Forbes Asia .