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Contemporary Issues

Emerging Markets and International Business

Daniel Hui
School of Marketing, Seneca College
What are emerging markets?
 Emerging markets are countries that are restructuring their economies
along market-oriented lines
 They offer a wealth of opportunities in trade, technology transfers, and
foreign direct investment.
 According to the World Bank, the five biggest emerging markets are China,
India, Indonesia, Brazil and Russia.
 Other countries that are also considered as emerging markets include
Mexico, Argentina, South Africa, Poland, Turkey, and South Korea.
 These countries made a critical transition from a developing country to an
emerging market.
 Each of them is important as an individual market and the combined effect
of the group as a whole will change the face of global economics and
politics.
What Makes Them Different?
Emerging markets stand out due to four major characteristics.
1. They are regional economic powerhouses with large populations, large resource
bases, and large markets. Their economic success will spur development in the
countries around them; but if they experience an economic crisis, they can bring
their neighbors down with them.
2. They are transitional societies that are undertaking domestic economic and
political reforms. They adopt open door policies to replace their traditional state
interventionist policies that failed to produce sustainable economic growth.
3. They are the world's fastest growing economies, contributing to a great deal of
the world's explosive growth of trade.
 By 2020, the five biggest emerging markets' share of world output will double to 16.1 percent from 7.8
percent in 1992.
 They will also become more significant buyers of goods and services than industrialized countries.
4. They are critical participants in the world's major political, economic, and social
affairs. They are seeking a larger voice in international politics and a bigger slice of
the global economic pie.
What Brings Them into Being?
There are two potential causes for the creation of emerging markets:
1. The failure of state-led economic development
 state-led economic development failed to produce sustainable growth in the traditional
developing countries. This failure and its tremendous negative impact pushed those countries
to adopt open door policies, and to change from the state's being in charge of the economy
to facilitating economic growth along market-oriented lines.
2. The need for capital investment.
 the developing counties desperately needed capital to finance their development, but the
traditional government borrowing failed to fuel the development process. In the past, the
governments of the developing countries borrowed either from commercial banks or from
foreign governments and multilateral lenders like the IMF and the Word Bank.

 This often resulted in heavy debt overload and led to a severe economic imbalance.
 The past track record of many developing countries also demonstrates their inability
to well manage and efficiently operate the borrowed funds to support economic
growth.
What Brings Them into Being?
 In light of the unsatisfactory results of government borrowing, developing
countries began to rely on equity investment as a means of financing
economic growth. They seek to attract equity investment from private
investors who will become their partners in development.
 To attract equity financing, a developing country has to establish the
preconditions of a market economy and create a business climate that
meets the expectations of foreign investors.
 This change in financing sources thus became another factor leading to the
rise of emerging markets.
How Do They Change the Traditional View of
Development?
 The rise of emerging markets is changing the traditional view of development as
follows.
1. Foreign "investment" is replacing foreign "assistance." Investing in the
emerging markets is no longer associated with the traditional notion of
providing development assistance to poorer nations.
2. Emerging markets are rationalizing their trade relations and capital
investment with industrialized countries. Trade and capital flows are directed
more toward new market opportunities, and less by political consideration.
3. The increasing two-way trade and capital flows between emerging markets
and industrialized countries reflect the transition from dependency to global
interdependency.
 The accelerated information exchange, especially with the aid of the Internet, is
integrating emerging markets into the global market at a faster pace.
What Challenges Do They Face?
 In their effort to create a market economy and to ensure sustainable
development, emerging markets still face big challenges that come from
fundamental problems associated with their traditional economic and
political systems.
 A market economy requires those countries to redefine the role of the
government in the development process and to reduce the government's
undue intervention.
 Another serious problem that those countries have to confront is
controlling corruption, which distorts the business environment and
impedes the development process.
 An even more challenging task for those countries is to undertake
structural reforms with their financial system, legal system, and political
system, so as to guarantee a disciplined and stable economy that is relatively
free of political disturbances and interference.
What Are Their Prospects?
 Emerging markets are the "key swing factor" in the future
growth of world trade and global financial stability, and they will
become critical players in global politics.
 They have a huge untapped potential and they are determined
to undertake domestic reforms to support sustainable
economic growth.
 If they can maintain political stability and succeed with their
structural reforms, their future is promising.
Latest Global
Economic
Outlook
Latest Global Economic Outlook
Key Issues

Source: OECD Economic Outlook 99, June 1, 2016


Economic Vulnerability
Science and Technology in the BRICs
 The BRIC countries of China, India and Brazil account for much of the dramatic
increase in science research investments and scientific publications.
 Since 2002, global spending on science R&D has increased by 45 percent to
more than $1,000 billion (one trillion) U.S. dollars.
 From 2002 to 2007, China, India and Brazil more than doubled their spending
on science research, raising their collective share of global R&D spending from
17 to 24 percent.
 China’s development planning has targeted a number of scientific fields and
related industries, including clean energy, green transportation and rare earths,
among others.
 Since 1999, China’s spending on science R&D has grown 20 percent annually to
more than $100 billion.
 By 2020, China plans to invest 2.5 percent of GDP in science research.
Infrastructure Fuels Growth in BRIC Countries
Overcoming Obstacles in Infrastructure Development

 Government Regulation
 Corruption
 Sustainability / Environment concerns
Growth Environment Score (GES)
 The Growth Environment Score (GES) was introduced by Goldman Sachs in the
same paper that identified the Next 11.
 The GES is an index developed to measure the extent to which structural
conditions and policy settings in a country are conducive to transforming the
economic potential of the BRICs, Next 11 and other countries into reality.
 The GES consists of 13 sub-indices that fall under one of five categories of
economic growth determinants:
 Macroeconomic stability – inflation, government deficit and external debt
 Macroeconomic conditions – investment and openness
 Technological capabilities – penetration of phones, PCs and internet
 Human capital – average years of secondary education and life expectancy
 Political conditions – political stability, rule of law and corruption
IMF Economic Outlook
 Growth in the United States was stronger than expected, averaging about 4
percent annualized in the last three quarters of 2014.
 Consumption—the main engine of growth—has benefited from steady job
creation and income growth, lower oil prices, and improved consumer confidence.
 The unemployment rate declined to 5.5 percent in February, more than 1
percentage point below its level of a year ago.
 In Japan, after a weak second half of the year, growth in 2014 was close to
zero, reflecting weak consumption and plummeting residential investment.
 In the euro area, activity was weaker than expected in the middle part of
2014 but showed signs of a pickup in the fourth quarter and in early 2015,
with consumption supported by lower oil prices and higher net exports.

Source: IMF - World economic outlook 2015


IMF Economic Outlook
 Although activity was broadly in line with the forecast, investment growth in
China declined in the second half of 2014, reflecting a correction in the real
estate sector, and high-frequency indicators point to some further
slowdown.
 Growth in Latin America in the second half of 2014 was modest, reflecting
weak activity in Brazil, lower than- expected growth in Mexico, and
weakening momentum in other economies in the region.
 Economic performance in Russia was a bit stronger than expected in the
second half of 2014, but the increase in geopolitical tensions, declining
confidence, and the repercussions of the oil price decline point to a more
severe weakening of the outlook in the Commonwealth of Independent
States (CIS) as a whole at the start of the year.

Source: IMF - World economic outlook 2015


What happened in 2014-15…
 Investors are fleeing markets from emerging markets, tanking currencies, stocks
and sentiment – while stock markets in the US and Japan have soared
 Part of the problem is the start of “tapering” the QE policy by the Fed.
 Investors are unwinding their positions from perceived “high risks” investments
in emerging markets – who have benefited from “cheap” foreign funds to finance
current account deficits
 China – is suffering from a severe slowdown since the late 1990s (still a
formidable 6.5%, but down from persistent double digits for over 20 years)
 India is feared to be trapped in stagflation
 Brazil is expected to grow a lot slower than previously forecasted.
 Research firm Capital Economics forecast growth in emerging markets overall
to be around 4.5% in 2014 – well below the average 6% since 2000, and the
5.1% forecast by WEO in 2013.

Source: IMF - World economic outlook 2014


China – 10 forces forging China’s future
1. The great rebalancing
2. Infrastructure advances
3. The green challenge
4. Manufacturing’s makeover
5. Rise of the upper middle class
6. E-tailing extraordinaire
7. Innovation’s new spark
8. Financier to the world?
9. Investor confidence
10. Cultivating human capital

Source: McKinsey Quarterly, July 2013