Emerging Economies

Question 1

What characteristics do emerging economies have that make them stick out in comparison to developing countries?

Answer 1

Specialisation in the production of manufactured goods

• emerging economies have taken over from developed economies in the mass production of low-end, cheap products
• some, in particular China, are now focusing on high-end products

High rates of economic growth
-India and China have exceeded the average growth rate in developed economies by being consistently above 7% since the 90s

High spending on education and training
-investing a lot of money in e duration and training will quality of labour in their countries and make them more productive

Large volume of exports

• China has had export-led growth
• the value of exports as a proportion of GDP is a lot higher than in developed countries

Large increases in investment
-being able to afford investing in large capital projects will in case economic growth and productivity

Pegged currencies

• it’s common for emerging economies to ‘peg’ currencies to the US Dollar
• as a result, their currency remains relatively weaker the dollar and their exports remain competitive

High spending on infrastructure
-to support export-led growth a lot of money is spent on infrastructure

High saving ratio

• Asian economies in particular have a high level of savings to income ratio
• this provides capital for banks to lend for investment
• some emerging economies want to reduce this ratio so they become more consumption led
• this will protect them fm external shocks such as the Eurozone, which reduces the value of exports and can severely damage their economies

Question 2

Why may a U.K. firm invest in emerging economies?

Answer 2

There will be a reduction in production costs

• the lower wage rates in these countries will reduce the U.K. company’s production costs which will make them more competitive
• this could result in greater sales and higher profits

UK manufacturers may wish to take advantage of new markets
-the size of the population and growing wealth will help achieve economies of scale

Question 3

What are the risks to the UK economy of firms investing in emerging economies?

Answer 3

Loss in jobs in the U.K.

• as UK MNCs move abroad because labour is cheap, jobs in the UK might be lost
• emerging economies do not have National Minimum Wage Legislation like the UK , so wage rate can be minimal

Increase in imports

• goods that were once made in the UK are now made in emerging economies and imported into the UK
• this will have a negative impact on the UK’s Balance of Payments

Loss of tax revenue

• MNCs can avoid paying UK Corporation Tax by practicing transfer pricing by selling goods from one division to another between countries
• this results in a loss of tax revenue for the UK government e.g. Amazon, Starbucks

Increased competition in global markets
-as more MNCs set up in emerging economies in the African and Asian continents, it is going to become mor challenging for UK National companies to be able to compete globally on the export market

Question 4

What are the advantage of Foreign Direct Investment for emerging economies?

Answer 4

• provides employment
• provides training
• brings technology/capital
• higher living standards
• better working conditions
• exporting industries

Question 5

What are the disadvantages of Foreign Direct Investment for emerging economies?

Answer 5

• may lead to the demise of local industry as a result of competition
• environmental damage i.e. Pollution, congestion
• may lead to inflationary pressure as a result of increased spending on goods and services
• exploitation of workers/resources