By Val Samonis

Emerging Markets: Their Origins, Nature, Geography |
Trends in Emerging Markets |
Distinguishing Features of Emerging Markets |
Corporate Strategies for Emerging Markets

Emerging Markets:
Their Origins, Nature, Geography

  • The fundamental shift in business/economic development paradigm :

    -from government regulation and protection to freer markets based on private property and competition worldwide

    -fall of communism is the most important international development since the World War II. Over 40% of the world's population face a long and truly historical process of the postcommunist transformation including the crucial task of managing transitions from plan to market

    -successes of East Asian tigers, failures of nationalizations and other market-distorting policies in many other developing countries, as well a relative failure of Western "welfare states", have led most countries of the world to undertake policy reforms aimed at addressing the challenges confronting them

  • Riding on this shift in paradigm are worldwide trends:

    - towards increased privatization and openness of many formerly bureaucratized and closed economies

    - regional and global integration based on commonly accepted principles of private property and competitive markets

  • As a consequence, many formerly isolated economies emerge as players in the "global village":

    - increasing opportunities for profitable trade and investment worldwide

    -geographically, these emerging markets cover a vast and expanding area; most of them can be found in Central and Eastern Europe, Russia, Caucasus, Central and East Asia, esp. China, Vietnam, India, Indonesia, and Latin America, esp. Mexico, Chile, Brazil, Argentina etc.

    -these are usually large and growing markets, accounting for over a half of the world's population which is hungry for modern goods and services

    -US Department of Commerce classifies some of them as Big Emerging Markets (BEM): The Chinese Economic Area (China, Hong Kong, Taiwan), South Korea, India, ASEAN (Brunei, Malaysia, The Philippines, Singapore, Thailand, Indonesia, Vietnam), Brazil, Argentina, Mexico, South Africa, Turkey and Poland


Trends in Emerging Markets

  • Most emerging markets opted for systemic reforms reflecting the shift in the paradigm:

    - removal of legacies or discontinuation of bureaucratization and state interventionism

    - internal and external liberalization and macroeconomic stabilization

    - systemic changes: privatization, demonopolization, enterprise restructuring (new governance, finance), restructuring of banking and finance

    - opening to the world and economic integration

    - building new institutions serving market economy and democracy (such as banks, contract law, commercial dispute settlement mechanisms, etc) aimed at underpinning reforms anchored in the paradigm shift

  • As a consequence of the paradigm shift and higher development levels achieved in emerging markets, (national and international) public trade
    and investments are being replaced by private ones:

    -according to the Institute for International Finance, private international investment flows to emerging markets amounted to $255 billion in 1996 which is a more than fourfold increase over 1990

    -about half of these flows took the form of equities. Asian economies, especially China, were the leading recipients with some $131 billion in net inflows

    -US exports to BEM already are now virtually identical to exports to the European Union and Japan combined - $161 billion; by 2000, US exports to BEM should substantially exceed exports to the EU and Japan combined

    -BEM GDP is currently 25 percent of that of the industrialized world. By 2010, BEM GDP is expected to be 50 percent of that of the industrialized world. Comprising half the world's population, BEM are expected to double their share of the world's imports to nearly 27 percent by 2010. No other category of markets shows such dramatic growth potential.

    -Business opportunities are incredible. Infrastructure projects in just the Asian BEM will require an investment of over $1 trillion in the decade ahead. China is just now establishing a system of highways and will need our help. Only some 60,000 Chinese own private cars, but the numbers will explode over the next few years. China will be building two power plants a month for the foreseeable future. Poland is Europe's fastest growing major economy and needs an infrastructure up to EU standards. Other BEMs, such as Russia and Ukraine, are expected to grow rapidly in the near future


Distinguishing Features of Emerging Markets
(in comparison to developed markets)

  • Lower overall political stability, faster change, increased risk:

    -lower political stability at the national level, authoritarian regimes in some markets

    -underdeveloped or nonexistent regional or local governance

    -increasing political and cultural sensitivity at national and subnational levels - higher though generally decreasing levels of government intervention in economic life, especially in the primary sector industries like oil, etc.

  • Lower economic stability, faster change, increased risk:

    - inconsistent and incoherent economic policies

    - economic and social tensions produced by higher economic growth levels

    - underdevelopment of the middle class and more pronounced societal stratification

    - lesser competition on factor markets and
    products/services markets

  • Underdeveloped infrastructure:

    -underdeveloped physical infrastructure (roads, communications, etc)

    -underdeveloped or nonexistent institutional infrastructure

    -educational levels of labor force which are growing rapidly but are uneven or difficult to assess

  • Underdeveloped rule of law:

    - higher incidence of corruption

    - larger informal sectors

    - contract enforcement which is more difficult than in developed countries

    - profit repatriation which is more difficult than in developed countries

  • Higher economic growth rates:

    -increased opportunities for profitable trade

    -increased opportunities for profitable investment


Corporate Strategies for Emerging Markets

  • Categories of possible corporate strategies for emerging markets:

    - "quick buck" strategies
    These "hit, bill, and run" approaches to doing business are sometimes characteristic of newcomers to emerging markets. They allow to tap shallow business opportunities but in almost every case fall short of deeper cooperation which is more profitable in the longer term.

    - "enclave" strategies
    These strategies involve a longer-term building of diversified presence in an emerging market. Usually, the goal is to build an operation independent of local supply networks or other local business environment which is judged to be less than reliable in terms of quality, just-in-time deliveries or other important aspects of business operation. Some of these approaches result in the "cathedrals in the desert" phenomenon

    - "learning for earning" strategies
    "Learning for earning" usually involves sacrificing short-term profits for the sake of developing better understanding of emerging markets through
    the process of learning-by-doing. Ultimately, the reward for the adoption of such strategies takes forms such as the increased business confidence,
    more stable relationships with partners in emerging markets, etc, producing higher profits in the longer term

    - "integrative national treatment" strategies
    These strategies are predicated upon the achievement of quite high levels of market development in emerging markets. They basically amount to treatment of trade and investment into emerging markets as if they already were as sophisticated as markets of developed countries and, therefore, doing business with them to a great extent resembles doing business domestically. These strategies may not yet be workable in many emerging markets.

  • General advice on workable strategies for emerging markets:

    - be flexible and adaptable in your approach to emerging markets

    - be prepared in advance and still willing to learn by doing as you go into emerging markets

    - consider all possibe modes of entry (from simple trade to a wholly owned subsidiary) but select those which will maximize your profit in the longer term

    - cultivate governament relations at local, regional, and national levels in emerging markets;

    - show cultural sensitivity at both national and subnational levels; language of your client should be the language of your business if possible

    - cultivate labor relations, especially merit- and performance-based employee assessment and promotions

    -be willing to adopt best practices of good corporate citizenship in emerging markets

    - adopt a longer-term perspective in profit expectations

    - do your research and seek advice (including from your own government) before making a move into emerging markets


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2003 SEMI
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