Emerging Markets Flashcards
emerging market economy
is the economy of a developing nation that is becoming more engaged with global markets as it grows.
As an emerging market economy develops
it typically becomes more integrated with the global economy. That means it can have increased liquidity in local debt and equity markets, increased trade volume and foreign direct investment.
Characteristics of developed markets may include
strong economic growth,
high per capita income,
liquid equity and debt markets,
accessibility by foreign investors, and a
dependable regulatory system.
unified currency,
stock market, and
banking system;
Emerging market countries also often pursue domestic programs such as investing in educational systems, building physical infrastructure, and
enacting legal reforms to secure investors’ property rights.
they’re in the process of industrializing
Emerging market economies tend to
move away from activities focused on agricultural and resource extraction toward industrial and manufacturing activities. Their governments usually pursue deliberate industrial and trade strategies to encourage economic growth and industrialization.
These strategies include export led growth and import substituting industrialization. The former strategy is more typical of economies that are considered emerging since it promotes more engagement and trade with the global economy.
Currently, some notable emerging market economies include
India, Mexico, Russia, Pakistan, Saudi Arabia, China, and Brazil.
Critically, an emerging market economy is transitioning
is transitioning from a low income, less developed, often pre-industrial economy towards a modern, industrial economy with a higher standard of living.
Emerging market economies can offer
greater returns to investors due to their rapid growth.
They also offer greater exposure to some inherent risks due to their status.
political instability,
domestic infrastructure problems,
currency volatility, and
illiquid equity, as many large companies may still be state-run or private.
Over time, emerging markets typically adopt reforms
seen in developed markets/advanced economies.
Market efficiency
and strict standards in accounting and securities regulation are generally not on par with advanced economies
Market liquidity
refers to the extent to which a market, such as a country’s stock market or a city’s real estate market, allows assets to be bought and sold at stable, transparent prices.
Frontier markets
are usually smaller than emerging markets, with lower per capita income, less market liquidity, and less industrialization. While they offer attractive investment opportunities, frontier markets are considered riskier for investors than emerging markets
Economic and Market Conditions.
A defining feature of emerging market economies is that they are “low-income, rapid-growth countries using economic liberalization as their primary engine of growth
These economies are often characterized by rapidly improving living standards, active consumer markets, and a burgeoning middle class population
Capital markets also tend to be less developed in emerging economies than in advanced ones – thus, making financial exchanges more volatile, trading less liquid, and inflation particularly problematic. Moreover, key financial intermediaries such as accounting firms, financial analysts, and venture capitalists are typically either absent or only marginal present (Li & Atuahene-Gima, 2002; Peng & Heath, 1996) – creating information asymmetries within the markets that can be exploited by firms. Not only does this increase the potential for opportunism because of the prohibitively high costs monitoring (Marquis & Qian, 2014), but it also makes legal contracts difficult to enforce. Overall, the conditions imply a relatively higher degree of volatility in the market and rapidly changing risk profiles, as compared to their more developed counterparts.
Institutional Conditions.
In addition to baseline economic differences, numerous political, legal, socio-cultural, and technological factors differentiate the business environment of emerging economies from that of developed economies. One critical factor is the strong influence of the government and the prevalence of state-owned firms (Douma, George, & Kabir, 2006; Evans, 1995; Musacchio, & Lazzarini, 2014; Ralston Terpstra-Tong, Terpstra, Wang, & Egri, 2006). As Kowalski et al. (2013) point out, the shares of SOEs among the Forbes Global 2000 companies currently exceed 50% for China, India and Indonesia; and are at 39 and 19% for Russia and Brazil, respectively. Given these figures, it is important for businesses to consider the
frequency and level of government interventions, as well as the overall stability of the political environment in their operational decisions. As studies have shown, emerging market governments may be more susceptible to external conflicts, coups, and internal tensions – which can create a difficult operating environment for companies
Beyond differences in political and legal institutions,
there are critical differences in the socio-cultural environment of emerging economies. Emerging economies, in particular, tend to be characterized by a younger population, an expanding workforce, and rapid urbanization. These factors have important implications for day-to-day business operations, including marketing and promotion strategies, staffing and training, and consumer preferences. In addition, many socio-cultural issues in emerging economies are ideologically fuelled – suggesting that some of the parties involved may have an interest in sustaining rather than resolving conflicts
Socio-cultural bridging strategies in emerging economies.
In emerging economies, organizations need to address a set of complex demographic and socio-cultural issues. As noted earlier, organizations must attend to demographic challenges such as a young workforce, lack of available skilled workers, and increasing urbanization. These challenges may require companies to invest heavily in employee training and development, to bring over experts and managers from the organizations’ home countries, and/or to make location decisions based on the availability of skilled labor. Further, as more companies peg their prospects for growth on emerging markets, the “war for talent” intensifies – leaving companies with the challenging task of recruiting and retaining a local workforce that now has more options and higher expectations. (Ready, Hill, & Conger, 2008)
In terms of socio-cultural issues, emerging economies often face a number of challenges including demographic disparities, ideologically-fuelled social unrest, and local hostility toward growing migrant worker populations (James, 2011; Lamertz et al. 2003).
Relatedly, there are still strong societal expectations from the labor force and wider public that organizations provide healthcare, education, and accommodation for employees and their families (Han, Zheng, & Xu, 2014; Kriauciunas & Kale, 2006; Zu & Song, 2009). Addressing these residual expectations is often challenging for organizations because they typically run counter to the logic of capitalism, which stresses the primacy of markets and competition (Tilcsik, 2010).
Stages of Economic Development
Stage 1: The traditional society
Stage 2: The preconditions for takeoff
Stage 3: The takeoff
Stage 4: The drive to maturity
Stage 5: The age of high mass consumption
The United Nations groups countries into three categories:
AEs (advanced economies)
DEs (developing economies)
EE (emerging market economies)
Newly Industrialized Countries (NICs) - Countries that are experiencing rapid economic expansion and industrialization and do not exactly fit as AEs or EEs
advanced vs developing vs emerging market economies AND EXAMPLES
advanced economies are post-industrial countries characterized by high per capita income, highly competitive industries, and well-developed commercial infrastructure. Examples world‟s richest countries and include Australia, Canada, Japan, New Zealand, the United States, and Western European countries.
NEXT
Developing economies are low-income countries characterized by limited industrialization and stagnant economies. Examples low-income countries, with limited industrializationand stagnant economies- e.g. Bangladesh, Nicaragua and Zaire.
NEXT
Emerging market economies are a subset of former developing economies that have achieved substantial industrialization, modernization, improved living standards and remarkable economic growth Examples some 27 countries in East and South Asia, Latin America, Middle East and Eastern Europe- including Brazil,Russia, India, China (so called BRIC countries)
Advanced economies characteristics
Mature state of industrial development; transitioned from manufacturing economies into service-based economies.
*Home to 14% of the world’s population, and account for half
of world GDP, over half of world trade in products, and three-quarters of world trade in services.
*Political systems democratic, multiparty systems of government.
*Economic systems typically based on capitalism, with relatively little government intervention in business. Serious purchasing power; few restrictions on international trade and investment.
They host the world’s largest MNEs. Example Ireland, which has one of the world’s best performing economies, with much FDI from foreign manufacturers in high-tech industries such as Gateway
Developing economies characteristics
Low discretionary incomes, limited proportion of personal income spent on purchases other than food, clothing, and housing. In developing economies, 17% live on less than$1 per day; 40% live on less than $2 per day.
The combination of low income and high birthrates tends to perpetuate poverty.
Developing economies characteristics
Hindered by high infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems; correlates with economic development, the vicious cycle of poverty. Productivity is stagnant; living standards deteriorate. Debt Governments in developing economies are often severely indebted- countries in Africa, Latin America, and South Asia have debt levels close to their annual GDP. Bureaucracy
Much of Africa’s poverty is the result of government policies that discourage entrepreneurship, trade, and investment. Example starting a new business: in sub-Saharan countries in Africa involves an average of 11 different approvals, and takes 62 days to complete. In advanced economies, takes an average of 6 approvals, and 17 days to complete.
Emerging economies characteristics
Most distinguishing characteristic- countries are enjoying rapidly improving living standards and a growing middle class with rising economic aspirations. Importance in the world economy is increasing as attractive destinations for exports, FDI, and sourcing. Emerging market countries are evolving towards wealthy nation status. Examples : Hong Kong, Israel, Saudi Arabia, Singapore, South Korea, and Taiwan have developed beyond the emerging market stage.
2004- emerging markets- the Czech Republic, Hungary, and Poland, received a boost when they became members of the European Union. By joining the EU, these countries had to adopt stable monetary and trade policies. They leverage their low-cost labor to attract investment from Western Europe, thereby boosting their economies.
Emerging Market Dynamics
Emerging markets account for over 40 percent of world GDP. They represent over 30 percent of exports and receive over 20 percent of FDI.
Mid-2000s, the emerging markets collectively enjoyed an average annual GDP growth rate of nearly 7%, a remarkable feat much faster than advanced economies
Benefit from: low-cost labor, knowledge workers, government support, low-cost capital, and powerful, highly networked conglomerates
The New Global Challengers (Boston Consulting Group Study)
Some 100 companies from Emerging Markets(called Rapidly developing Economies in the BCG study) are poised to become important 21° century multinationals.
Examples:
Brazil: Embraer, Sadia & Perdiago, Natura Mexico: America Movil, Groupo Modelo
India: Ranbaxy, Infosys, Tata Tea, WIPRO
China: Galanz, Haier, Chunlan Group Corp.,Lenovo, Pearl River Piano
Turkey: Koc Holding, Vestel & Sisecam
Developing Economies Evolving into Emerging Markets (Examples +)
European countries of Estonia, Latvia, Lithuania, Slovakia.
Latin American countries of Costa Rica, Panama, and Uruguay.
*
Kazakhstan, Nigeria, Vietnam, and the United Arab Emirates.
*
Economic prosperity varies within emerging markets-there are usually two sets of economies those in urban areas (more developed economic infrastructure) and those in rural areas (less discretionary income).
*
Transition economies = Privatization of former state enterprises since 1989 after transition from centrally planned economies into liberalized markets: Czech Republic, Hungary, and Poland; also China and Russia
Transition Economies
Transition economies engaged in large-scale privatization of state-owned enterprises. Excessive regulation and entrenched government bureaucracy, now are introducing legal frameworks to protect business and consumer interests and ensure intellectual private property rights.
Russia endured high inflation with annual price increases reaching 100%, hindering foreign investment and economic development.
Shaking off the Soviet legacy required the country to restructure not just firms and institutions, but also adopt new values about private ownership, profits, intellectual property, etc.
Initially, western companies doing business in Russia found it difficult to recruit managers who understand modern management practices
What Makes Emerging Markets Attractive?
Emerging markets are attractive as target markets, manufacturing bases, and sourcing destinations. 1. Emerging Markets as Target Markets
Growing middle class - emerging markets have become important
represent substantial demand for electronics and automobiles and health care services.
The largest emerging markets have doubled their share of world imports in the last few years.
Emerging markets are excellent targets for manufactured products, technology, and sophisticated technology: Textile machinery industry in India is huge; Oil and gas exploration plays a vital role in Russia
Agriculture is a major sector in China
Emerging Markets can Serve as Niche Markets for ..
Lockheed Aircraft, whose Hercules turboprop is a popular airliner in poorer countries, has developed transport planes that carry bulk commodities at relatively low costs.
Novartis and Pfizer are pharmaceutical firms that reap big profits from selling vaccines and medicines that can be stored without refrigeration when shipped to distant markets.
Demand is growing fastest in emerging markets- Black &Decker and Robert Bosch, the fastest-growing market share in Asia, Latin America, Africa, and the Middle East
Governments and state enterprises are targets for sale of infrastructure-related products/services- machinery power transmission equipment, transportation equipment, high-technology products, etc.
Emerging Markets As Manufacturing Bases
Emerging markets as manufacturing bases ow-wage, high-quality labor for manufacturing and assembly operations.
Large reserves of raw materials and natural resources. South Africa is a key source for industrial diamonds.
Brazil long has been a center for mining bauxite, the main ingredient in aluminum. Thailand has become an important manufacturing location for Japanese MNEs such as Sony, Sharp, and Mitsubishi.
Malaysia and Taiwan- Motorola, Intel, and Philips manufacture semiconductors there. Mexico and China- platforms for consumer electronics and auto assembly.
Emerging Markets As Sourcing Destinations
Outsourcing procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent, external suppliers. Helps foreign firms become more efficient, concentrate on their core competences, and obtain competitive advantage.
Offshoring when sourcing involves foreign suppliers or production bases.
Global sourcing refers to the procurement of products and services from foreign locations. Procurement can be from either independent suppliers or company-owned subsidiaries.
Market Potential Indicators
Three practical approaches firms employ in assessing market potential of individual countries are:
per-capita income
size of middle-class, and
A mix of market potential indicators
Market potential may be assessed with aggregate country data, such as gross national income (GNI) or per-capita GDP, expressed in terms of a reference currency, such as the U.S. dollar.
Middle Class as an Indicator of Market Potential
The middle class represents the proportion of people in between the wealthy and the poor, has economic independence and consume many discretionary items, including electronics, furniture, automobiles, recreation, and education.
In emerging markets, the size and growth rate of the middle class serve as signals of a dynamic market economy
Demographic trends indicate that, in the coming two decades, the proportion of middle-class house holds in emerging markets will become much bigger, with enormous spending power.
Emerging Market Potential Index (EMPI)
The EMPI combines factors that provide firms with a realistic measure of export market potential:
Market Size he country’s population, especially urban population
Market Growth Rate the country’ real GDP growth rate
Market Intensity private consumption and GNI represent discretionary expenditures of citizens
Market Consumption Capacity The percentage share of
income held by the country’s middle class
Commercial Infrastructure characteristics such as number of mobile phone subscribers, density of telephone lines, number of PCs, density of paved roads, and population per retail outlet
*Economic Freedom the degree of government intervention
Market Receptivity the particular country’s inclination to trade with the exporter’s country as estimated by the volume of imports
Country Risk the degree of political risk
Challenges of Doing Business in EMs
Political Stability
Weak Intellectual Property Protection
Bureaucracy and Lack of Transparency
Partner Availability and its skills
Dominance of Conglomerates
Microfinance to Facilitate Entrepreneurship
Microfinance refers to providing small-scale financial
services, such as “microcredit” and “microloans,” that
assist entrepreneurs in poor countries-providing small loans, frequently less than $100, small-scale entrepreneurs (primarily women) accumulate sufficient capital to launch businesses that help pull them out of poverty.
*
This concept led economics professor Muhammad Yunus to found the Grameen Bank in Bangladesh in1974- now has over 2,100 branches- with 17microfinance organizations in China- and has helped millions of Grameen borrowers in Bangladesh rise out of acute poverty
Emerging countries growth factors
The factors that existed to some extent during the economic growth were as follows:
Political stability in policies affecting their development
Economic and legal reforms
Entrepreneurship
Planning
Outward orientation
Factors of production
Industries targeted for growth
Incentives to force a high domestic rate of savings and to direct capital to update the infrastructure, transportation, housing, education, and training
Privatization of state-owned enterprises (SOEs) that placed a drain on national budgets
Objectives of Emerging Countries
Industrialization is the fundamental objective of most developing countries.
Most countries see in economic growth the achievement of social as well as economic goals.
Better education
Better and more effective government
Elimination of many social inequities
Improvements in moral and ethical responsibilities
The trend toward privatization is currently a major economic phenomenon in industrialized as well as in developing countries.
Dynamic Transformation of emerging markets clusters
slide 45
Big emerging markets share a number of important traits
Are all physically large
Have a significant populations
Represent considerable markets for a wide range of products
Have strong rates of growth or the potential for significant growth
Are of major political importance within their regions
Are “regional economic drivers”
Will engender further expansions in neighboring markets as the grow
Because many of these countries lack modern infrastructure, much of the expected growth will be in industrial sectors.
Asia
Asia has been the fastest-growing area in the world for the past three decades.
Asian-Pacific Rim
Four Tigers (Hong Kong, South Korea, Singapore, Taiwan)
First countries in Asia to move from a status of developing countries to newly industrialized countries.
China
Aside from the U.S., there is no more important single market than China.
Two major events that occurred in 2000 are having a profound effect on China’s economy
Admission to the WTO
U.S. granting China normal trade relations on a permanent basis.
China
China (continued)
China has two important steps to take if the road to economic growth is to be smooth :
Improving human rights
Reforming the legal system
The American embassy in China has seen a big jump in complaints from disgruntled U.S. companies.
Two Chinas – one a maddening bureaucratic, bottomless money pit, the other an enormous emerging market.
Hong Kong, Taiwan, India
Hong Kong
Hong Kong reverted to China in 1997 when it became a special administrative region (SAR) of the People’s Republic of China.
The Hong Kong government negotiates bilateral agreements and makes major economic decisions on its own.
The keys to Hong Kong’s economic success:
Free market philosophy
Entrepreneurial drive
Absence of trade barriers
Well-established rule of law
Low and predictable taxes
Transparent regulations
Taiwan
Mainland-Taiwan economic ties are approaching a crossroads as both countries enter the World Trade Organization
India
Five-Point Agenda
Improving the investment climate
Developing a comprehensive WTO strategy
Reforming agriculture, food processing and small scale industry
Eliminating red-tape
Instituting better corporate government
Summary
The foreign marketer of today and tomorrow must be able to react to market changes rapidly and to anticipate new trends within constantly evolving market segments that may not have existed as recently as last year.
As nations develop their productive capacity, all segments of their economies will feel the pressure to improve.
Though big emerging markets present special problems, they are promising markets for a broad range of products now and in the future.
Emerging markets create new marketing opportunities for MNCs as new market segments evolve.
