Emerging Economies

Business Development in Emerging Economies Business Development in Emerging Economies Coursework Coursework Contents A. In your opinion, what is the future of emerging economies? Support your answer with relevant evidence. (2000 words)3 Introduction4 What are emerging economies4 Future of emerging economies5 Microeconomic approach6 Long-term economic perspectives7 The â€Å"Euro† perspective8 Facts about the future9 Forecast11 Opinion12 Risks for emerging markets12 B. Critically discuss the factors driving the growth of emerging MNEs. Use relevant company and country examples. 500 words)14 What are MNEs (Multinational Enterprises)15 Facts about MNEs15 C. How formidable is the competition posed by emerging markets MNE's to the â€Å"Western† companies? Could it be country- or/and sector-specific? (500 words)18 References21 Business Development in Emerging Economies Coursework Submission A. In your opinion, what is the future of emerging economies? Support your answer wit h relevant evidence. (2000 words) B. Critically discuss the factors driving the growth of emerging MNEs. Use relevant company and country examples. (500 words) C.How formidable is the competition posed by emerging markets MNE's to the â€Å"Western† companies? Could it be country- or/and sector-specific? (500 words) A. In your opinion, what is the future of emerging economies? Support your answer with relevant evidence. (2000 words) Introduction What are emerging economies The emerging markets story began almost thirty years ago. In the mid-1980s, developed economies started on a debt-fueled consumer spending binge that lasted more than two decades. This provided an incredible opportunity for developing economies.So, emerging markets or emerging economies are nations with social or business activity in the process of rapid growth and industrialization. The seven largest emerging and developing economies by either nominal Gross Domestic Product or GDP (Purchasing Power Parity) are China, Brazil, Russia, India, Mexico, Indonesia, and Turkey. Some characteristics that define an economy as emerging are the following: * Intermediate income: its PPP per capital income is comprised between 10 % and 75 % of the average EU per capital income. Catching-up growth: during at least the last decade, it has experienced a brisk economic growth that has narrowed the income gap with advanced economies. * Institutional transformations and economic opening: during the same period, it has undertaken profound institutional transformations which contributed to integrate it more deeply into the world economy. Hence, emerging economies appears to be a by-product of the current globalization. Emerging markets are sought by investors for the prospect of high returns, as they often experience faster economic growth as measured by GDP.Investments in emerging markets come with much greater risk due to political instability, domestic infrastructure problems, currency volatility and l imited equity opportunities (many large companies may still be â€Å"state-run† or private). Also, local stock exchanges may not offer liquid markets for outside investors. These countries do not share any common agenda, so there are various lists of emerging markets, developed by various analysts such as The Economist, the International Monetary Fund, Dow Jones etc.. If we had to make a summary list it would be the following:Afghanistan|   Estonia|   Lithuania|   Qatar|   Sudan|   Argentina|   Hong Kong|   Malaysia|   Romania|   Taiwan|   Bahrain|   Hungary|   Mauritius|   Russia|   Thailand|   Bangladesh|   India|   Mexico|   Saudi Arabia|   Turkey|   Brazil|   Indonesia|   Morocco|   Singapore|   Tunisia|   Bulgaria|   Iran|   Nigeria|   Slovakia|   UAE| Chile|   Israel|   Oman|   Slovenia|   Ukraine| China|   Jordan|   Pakistan|   South Africa|   Venezuela|   Colombia|   Kuwait|   Peru|   Sr i Lanka|   Vietnam| Czech Republic|   Latvia|   Philippines|   South Korea|   Sudan|   Egypt|   Estonia|   Poland|   Qatar|   Taiwan| Future of emerging economiesIn the past decade emerging markets have established themselves as the world’s best sprinters. As serial crises tripped up America and then Europe, China barely broke stride. Other big developing nations paused for breath only briefly. Investors bet that rapid growth in emerging markets was the new normal, while leaders from Beijing to Brazil lectured the world on the virtues of their state-centric economic models. More than 80% of the world’s population lives in countries with emerging economies. As we can see in Figure 1, the share of emerging markets in global output has increased from below 20% in the early 90’s, to more than 30% today.Considering the cost of living differences, the share of emerging economies in world GDP already exceeds 45%, which is 13 percentage points higher than in the early 90’s. According to the International Monetary Fund’s (IMF), World Economic Outlook, this share will exceed 50% in 2013. Figure [ 1 ]: Share of emerging economies in world GDP in recent periods While these economies are already large, they keep growing strongly. Growth in emerging economies and increased resistance to economic and financial shocks mean good news for the global economy, which can definitely rely on the dynamism of emerging economies more than it did in the past.The residents of emerging economies’ countries benefited a lot from this rapid growth, as it led to rising living standards. During the period 2000-2009, the per capita GDP in these countries increased by more than 70%. The integration of emerging economies in world markets for goods and services happened smoothly. Regarding global exports of goods and services, the share of emerging economies almost doubled between the early 90’s and 2010, reaching 35%. Microecono mic approach The most important role of the emerging economies and reflected at the micro level.Specifically, six of the 25 largest companies in the world, for example, in terms of market value come from emerging markets. These companies are listed below, according to Global 2000 list for 2012, an annual ranking of the top 2000 public companies in the world by Forbes magazine. The ranking is based on a mix of four metrics: sales, profit, assets and market value. Rank| Company| Headquarters| Industry| Profits (billion $)| Assets (billion $)| Market Value (billion $)| 05| Industrial and Commercial Bank of China|   China| Banking| 25. 1| 2,039. 1| 237. 4| 07| PetroChina|   China| Oil and gas| 20. | 304. 7| 294. 7| 10| Petrobras|   Brazil| Oil and gas| 20. 1| 319. 4| 180| 13| China Construction Bank|   China| Banking| 20. 5| 1,637. 8| 201. 9| 15| Gazprom|   Russia| Oil and gas| 31. 7| 302. 6| 159. 8| 19| Agricultural Bank of China|   China| Banking| 14. 4| 1,563. 9| 154. 8| Long-term economic perspectives The present of emerging economies seems promising, but the future seems even better. According to forecasts for long-term growth based on demographic trends and models of capital accumulation and productivity, it seems that the role of emerging economies in the global economy will be even larger.More specifically, according to various surveys, the growth prospects of these economies are striking. The share of Brazil, Russia, India and China, if considered together, could by 2025 correspond to a rate of more than 50% share of the current six largest industrialized economies and to overcome it in less than 40 years. The â€Å"Euro† perspective From the perspective of the euro, the growing role of emerging economies provides various opportunities. More specifically, the dynamic growth of emerging economies is increasing demand for certain goods and tradable services where the euro zone has a comparative advantage.Also, competition from emerging ma rkets increases motivation for further progress in structural reforms in the euro zone, which are either way necessary. In addition, the Eurozone is capable of seizing new opportunities created by emerging economies. Exports and imports of goods and services of the euro zone represent a significant share of the GDP. Considering this, it is remarkable that the share of the euro zone exports (excluding trade within the euro zone) to Asia increased from 19% in 2000 to 22% in 2009, while exports to the United States decreased from 17% to 12% over the same period.China's share in total exports of the euro zone increased from 2% in 2000 to 5. 3% in 2009. Exports to Russia more than doubled over the same period from 1. 8% to 3. 9%, thus exceeding the exports to Japan, although the share of Russia was higher in 2008 (5. 0%), before the global trade collapsed. A similar trend was observed in India, though on a much smaller scale, as India’s share was 1. 7% of euro zone exports in 2009 . The crisis When the global financial crisis struck, emerging economies responded energetically: China launched a huge stimulus, Brazil’s state-owned banks avished credit, interest rates were slashed. They succeeded so well that by 2010 they were forced to reverse course. To squash price pressures they raised interest rates, curbed speculation and allowed their currencies to appreciate. With a lag, that tightening has had the predicted result. Still, the slowdown has proved much sharper than expected. Europe’s sovereign-debt crisis is partly to blame. It has sapped demand for the developing world’s manufactured exports and restrained prices of their commodities; South Africa is a notable casualty.European banks had been conduits for foreign money flowing into emerging markets. Now they are pulling back as they grapple with the problems at home. The issues of slowing growth, high government debts, rising unemployment, and aging populations within developed econo mies such as the United States presented headwinds for emerging market countries, which in the past had been much more reliant on the health of developed markets. However, because of earlier fiscal discipline, countries such as China, Brazil and Indonesia were able to stimulate economies on their own with low interest rates and massive stimulus packages.The central banks were recourse to those who needed to borrow money, in order to avoid a major crisis. In December 2011 and February 2012, the European Central Bank announced long-term refunding, while European banks borrowed about 1 trillion euros. The U. S. Federal Bank, along with many central banks from developed countries went on with liquidity injections. That move resulted to massive relief, as the markets stabilized and industrial production increased again. The question then was if this would last, allowing the global economy to keep on growing.This was more of concern for emerging economies, which were considered to be safe r than economically advanced countries. Many of them faced difficulties when they actually started developing, as they had to deal with massive poverty. Facts about the future Sadly, many emerging-world governments have interpreted the crisis in rich-world finance as a reason to preserve a more muscular role for the state. China has reserved some sectors for state-owned enterprises. In Brazil the big state-controlled oil company, Petrobras, and the tate-controlled banks have become virtual appendages of government policy. Having so much leverage over the economy is indeed helpful during a crisis, but in the long run it will stifle competition, starve the private sector of capital, deter foreign investment and know-how, and breed corruption. When the dust settles, emerging markets will still be growing faster than they did before 2003. But getting back up to the speed of the past decade will mean maintaining the macroeconomic discipline and returning to the microeconomic reforms that made it possible in the first place.A strong infrastructure has significant long-term benefits, such as a growing manufacturing base, an educated workforce and more mobile, and therefore more easily employable, societies. The build-out of fixed asset infrastructure in China, which has been strong over the past 15 years, continues today, particularly as the population becomes more urbanized. Brazil also continues to invest in infrastructure, with estimates in excess of $800 billion in infrastructure spending as the country prepares to host the 2014 FIFA World Cup and the 2016 Summer Olympic Games. For example, the case of India.Since 2009, India has deliberately inflated its deficit in order to offset the economic slowdown. Fiscal expansion was very efficient in promoting growth of demand and supply after several years’ restriction. However, now the expansion is limited. Unlike developed countries, most developing economies are under inflationary pressure, which can be worse than additional expensed. Thus, the short-term future seems to be reserving various dangers. Nevertheless, medium and long-term perspectives about emerging economies are positive. Countries that save money, invest in human capital and provide good governance can achieve rapid growth again.India, for example, saves and invests more than 30% of its GDP, devoting a significant percentage of these sources to infrastructure. Thus, the possibility of India expanding its business increases. Investors seem to take seriously into account this perspective. They seem to be very hesitant towards investments in private equity funds. Nonetheless, they provided India with 43,8 billion dollars in long-term direct investments during 2011-2012. Despite the current crisis, the outlook seems encouraging for other emerging economies too, such as Brazil, China and Indonesia.It’s obvious that during the second half of 2011, developing economies that have faced the economic crisis kind of well, star ted to feel pressure as the euro zone crisis was getting worse. Growth in Brazil, India, China and other countries noted a remarkable slow down. Global economy seems to be focusing on fast-growing markets that are outside BRIC (Brazil, Russia, India and China) as there is the perception that they are capable of integrating faster than the BRIC countries into the global economy due to a number of trade, investment, technological and cultural criteria.These markets achieve constantly high rates of economic growth at the same level with the BRIC countries. Turkey, Indonesia and Mexico come just after China and India in terms of GDP growth between 2000 and 2015. Peru, Colombia, Venezuela, Malaysia and Vietnam, along with some countries and regions of Africa are ready to be included in the list with the most dynamic countries in the world, regarding investments. It’s becoming more and more admissible that these countries are the most significant sources of income for the future ye ars.Same prospects seem to appear for South Africa, Indonesia, Mexico and Turkey, which are considered to be the most competitive ones. Executives from all around the economy world claim that they are planning to raise their investments in these markets. As goods’ and services’ trade goes back to the levels it was before the financial crisis and the flow of funds appears to steadily increase, technology and cross-border exchange of ideas will continue forcing growth and promoting globalization. Forecast Forecasts concerning the period of time from now and by 2015 don’t seem really encouraging for Europe and emerging economies.The last year’s liquidity injection was deemed to be an efficient policy, but it was certainly not a radical solution. No crisis looms, but serious concern is justified, for the emerging world faces two distinct risks: a cyclical slowdown and a longer-term erosion of potential growth. The first should be reasonably easy to deal with. The second will not. Fiscal discipline and investment has delivered for emerging economies up to this point. This can significantly contribute to future growth. If Europe can succeed in promoting large fiscal and banking reforms and put its economy in order, the crisis will probably subside.Otherwise it will remain until the end of 2014 and then Europe will be before high risk once again. Regarding the developing countries, they will definitely be influenced by the U. S. and Europe – the two largest economies in the world. Their slowdown will directly affect all developing countries. The analyst, Jean Louis Martin claims though, that emerging economies will account for 52% of the global economy. His forecast is based on current prices and exchange rates-compared with 38. 9% in 2011. Opinion Looking through the past as thoroughly as I can, and considering the risks, my opinion about a potential recovery tends to be negative.A slump in these countries thus looks unlikely; so, however, does a return to the past decade’s growth rates. China, for one, doesn’t want it. Its economy has become over-reliant on investment; its leaders want to usher in a phase of more sustainable but slower growth, led by consumers. Beyond China, it is increasingly clear that many emerging economies have been growing beyond their underlying potential. Optimists once thought India could sustain Chinese-style growth of over 9% a year; but that led to stubborn inflation and current-account deficits, suggesting that India’s potential growth may be more like 6-7%.There is no guarantee that emerging markets will experience stable, sustainable development, since numerous economic and political risks are lurking. Emerging countries are still vulnerable to economic changes that occur in developed countries. Risks for emerging markets There’s a number of potential sources of macroeconomic and political instability such as high fiscal deficits, over-dependence on oil revenues and gas, increasing disparities in income leading to social tensions and acroeconomic and financial instability. Many reports also highlight the pressures on natural resources from the rapid growth in emerging economies, including the increasing difficulty of keeping global warming within the maximum limit of two degrees Celsius. While new unconventional sources like shale gas have reduced fears of depletion of fossil fuels, the risks associated with the most unstable global climate patterns are expected, to follow a steady upward trend.Issues such as taxation of executive compensation, the proper scope of financial regulation, and international M;A have come to the foreground in the wake of the crisis, and stark international differences in opinions and policies on these matters are already evident. The differences will only become more pronounced as discussions about the appropriate near-term policy response to the crisis give way to debates about who should pay and how much.The multinational firms best able to anticipate and manage the related risks and opportunities will have the strongest competitive edge. B. Critically discuss the factors driving the growth of emerging MNEs. Use relevant company and country examples. (500 words) What are MNEs (Multinational Enterprises) As the name implies, a multinational corporation is a business concern with operations in more than one country. These operations outside the company's home country may be linked to the parent by merger, operated as subsidiaries, or have considerable autonomy.Firms tend to locate where barriers are easier to overcome. For firms in emerging countries, this initially meant locating in nearby countries with regional, cultural or language ties (so-called South-South FDI). This trend seems to be changing, however, as firms from emerging economies gain prominence. Facts about MNEs There are over 40,000 multinational corporations currently operating in the global economy, in additi on to approximately 250,000 overseas affiliates running cross-continental businesses.The top multinational corporations are headquartered in the United States, Western Europe, and Japan; they have the capacity to shape global trade, production, and financial transactions. Multinational corporations are viewed by many as favoring their home operations when making difficult economic decisions, but this tendency is declining as companies are forced to respond to increasing global competition. Multinational corporations follow three general procedures when seeking to access new markets: * merger with or direct acquisition of existing concerns * sequential market entry and joint ventures Here’s an example of sequential market entry, which often includes foreign direct investment, which involves the establishment or acquisition of concerns operating in niche markets related to the parent company's product lines in the new country of operation. Japan's Sony Corporation made use of s equential market entry in the United States, beginning with the establishment of a small television assembly plant in San Diego, California, in 1972. For the next two years, Sony's U. S. perations remained confined to the manufacture of televisions, the parent company's leading product line. Sony branched out in 1974 with the creation of a magnetic tape plant in Dothan, Alabama, and expanded further by opening an audio equipment plant in Delano, Pennsylvania, in 1977. After a period of consolidation brought on by an unfavorable exchange rate between the yen and dollar, Sony continued to expand and diversify its U. S. operations, adding facilities for the production of computer displays and data storage systems during the 1980s.In the 1990s, Sony further diversified it U. S. facilities and now also produces semiconductors and personal telecommunications products in the United States. Sony's example is a classic case of a multinational using its core product line to defeat indigenous competition and lay the foundation for the sequential expansion of corporate activities into related areas. Multinational corporations are thus able to penetrate new markets in a variety of ways, which allow existing concerns in the market to be accessed a varying degree of autonomy and control over operations.Multinationals today are viewed with increased suspicion given their perceived lack of concern for the economic well-being of particular geographic regions and the public impression that multinationals are gaining power in relation to national government agencies, international trade federations and organizations, and local, national, and international labor organizations. Despite such concerns, multinational corporations appear poised to expand their power and influence as barriers to international trade continue to be removed.They share many common traits, including the methods they use to penetrate new markets, the manner in which their overseas subsidiaries are tied to the ir headquarters operations, and their interaction with national governmental agencies and national and international labor organizations. In particular, factors that benefit MNEs growth are: * labor is relatively cheap * Ownership advantages encompass the development and ownership of proprietary technology or widely recognized brands that other competitors cannot use.Empirical analysis shows that multinationals are often technological leaders that invest heavily in developing new products, processes and brands, which are then kept confidential and are protected by intellectual property rights * technology being adopted is leapfrogging much of the legacy IT infrastructure that is still in use in developed countries * Localization advantages refer to the benefits that come from locating near the final buyers or closer to more abundant and cheaper production factors, such as expert engineering or raw materials multinationals internalize the benefits from owning a particular technology, brand, expertise or patent that they find too risky or unprofitable to rent or license to other firms due to the difficulties of enforcing international contracts * management and production expertise from the parent concern Other concerns raised by respondents included government regulation, established competition, and the availability of communications and digital infrastructure. C. How formidable is the competition posed by emerging markets MNE's to the â€Å"Western† companies? Could it be country- or/and sector-specific? 500 words) Right now more than 20,000 multinationals are operating in emerging economies. According to the Economist, Western multinationals expect to find 70% of their future growth there—40% of it in China and India alone. But if the opportunity is huge, so are the obstacles to seizing it. On its 2010 Ease of Doing Business Index, the World Bank ranked China 89th, Brazil 129th, and India 133rd out of 183 countries. Summarizing the bank’ s conclusions, the Economist wrote, â€Å"The only way that companies can prosper in these markets is to cut costs relentlessly and accept profit margins close to zero. Western companies have had many difficulties entering emerging markets to date, as they seemed to apply a wrong entering strategies, which were due to lack of knowledge and experience. Many companies have already been lured by the promise of profits from selling low-end products and services in high volume to the very poor in emerging markets. And high-end products and services are widely available in these markets for the very few who can afford them: You can buy a Mercedes or a washing machine, or stay at a nice hotel, almost anywhere in the world.Our experience suggests a far more promising place to begin: between these two extremes, in the vast middle market. Consumers there are defined not so much by any particular income band as by a common circumstance: Their needs are being met very poorly by existing low-en d solutions, because they cannot afford even the cheapest of the high-end alternatives. Companies that devise new business models and offerings to better meet those consumers’ needs affordably will discover enormous opportunities for growth.Take, for example, the Indian consumer durables company Godrej & Boyce. Founded in 1897 to sell locks, Godrej is today a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines. In workshops we conducted with key managers in the appliances division, refrigerators emerged as a high-potential area: Because of the cost both to buy and to operate them, traditional compressor-driven refrigerators had penetrated only 18% of the market. The markets and operating environments in India are radically different fromMNCs’ home markets, making it possible a wide range of competitive encounters and outcomes. For example, there are several layers of product and customer segments that reward different app roaches from competitors, making it possible for both local challengers and patient MNCs to find different starting places and, over time, compete more directly. Competition appears to be formidable for â€Å"Western† companies, since they are not really qualified to deal with MNEs of emerging markets, which keep on developing.Furthermore, it seems that the competition could definitely be both country and sector specific, as, regardless of the difference in trends perceived as important and the reported level of preparedness, companies, both Western and emerging multinationals, take a similar approach to the critical actions needed to address emerging countries’ consumer market trends. These include developing new products and services, adapting the brand strategy, conducting market research, and adapting the marketing communication strategy.References * Contessi S. , El-Ghazaly H.. (2010). Multinationals from Emerging Economies Growing but Little Understood. Available :http://research. stlouisfed. org/publications/regional/10/07/multinational. pdf. * Matthew J. Eyring, Mark W. Johnson, and Hari Nair. (2011). New Business Models in Emerging Markets. Available: http://hbr. org/2011/01/new-business-models-in-emerging-markets/ar/1 * Ernst & Young. (2013). Focusing on emerging markets. Available: http://www. net. gr/? i=news. el. article&id=338400 * Jean Louis Martin. (2012). Emerging Economies in 2020. Available: http://www. capital. gr/news. asp? id=1497484 * Unknown author. (2013). Challenges in development of emerging economies. Available: http://www. stockwatch. com. cy/nqcontent. cfm? a_name=news_view&ann_id=165565 * K. Ghosh and L. Yu. (2012). The future of emerging markets. Allianz Global Investors. 12 (1), 1-4 * AmCham and Booz & Company.