Emerging Markets Flashcards
(43 cards)
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.
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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.
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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
