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Chapter 9

Emerging Markets and Investment

Opportunities

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Learning Objectives Meaning of Emerging markets.To understand the special concerns dealing with emerging market economies.To survey the vast opportunities for trade offered by emerging market economies.To understand why economic change is difficult and requires much adjustment.To become aware that privatization offers new opportunities for international trade and investment.

What is an 'Emerging Market Economy'

An emerging market economy is a nation's economy that is progressing toward becoming advanced, as shown by some liquidity  in local debt and equity markets and the existence of some form of market exchange and regulatory body.

Emerging markets generally do not have the level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such as the United States, Europe and Japan), but emerging markets will typically have a physical financial infrastructure including banks, a stock exchange and a unified currency.

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Emerging market is a term that investors use to describe a developing country, in which investment would be expected to achieve higher returns but be accompanied by greater risk.

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Determining factors of Emerging Markets

Income. Lower and middle income economies with per capita income < $9,656 in 1997.

Financial market depth. Gross domestic production /GDP < 20%

Bloomberg Markets magazine ranked the top 20 based on more than a dozen criteria. The data come from Bloomberg's own financial-market statistics, IMF forecasts and the World Bank.

http://www.bloomberg.com/slideshow/2013-01-30/the-top-20-emerging-markets.htmlhttps://www.parametricportfolio.com/insights-research/paper/the-opening-of-saudi-arabias-markets-and-its-impact 7

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The Realities of Economic Change

Infrastructure shortages.

Capital shortages.

Consumer knowledge is vague.

Management problem.

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The Realities of Economic Change (cont.)

Given the poor market orientation in the previous business environment, managers must adapt their behavior in these areas:

Problem Solving

Decision Making

Customer OrientationDevelopmentTeam Building

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Adjusting to Global Change

Resistance to change should be expected in countries that experience rapid economic and political change.The established market economies of the West also must be prepared for change due to:

The reorientation trade flowsJob shiftsDeclines in employment

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International Business Challenges

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.The quality of products can be inferior in emerging market economies.

Lack of protection of intellectual property rights dissuade firms from investing in emerging market economies

Attempting to source products from emerging market economies can be problematic

The frequent unavailability of convertible currency makes many products out of reach for citizens of emerging market economies.

Global mix of natural resources

Global mix of capital

Opportunities for exchangeThe mismatch between resources and population provides an excellent opportunity for trade (exchange of goods and services).The mismatch between capital and population provides an excellent opportunity for investment (exchange of assets).Emerging Markets Finance is the vehicles that facilitate the interchange of resources and capital.

Financial vehicles Trade finance

Usually short term facilitiesForeign direct investment

Usually cross-border project and corporate finance performed by multinationals in setting up new productive capacity. Usually long-term in nature – 5-10 years time horizonRecently FDI flows have included services, such as electricity and telecommunications

Portfolio investments—equity and debt investments in corporate or sovereign entities

Very volatileHighly dependent on short-term liquidity conditions, such as interest rates and US monetary policy

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International Business Opportunities

Some transition economies have products that are unique in performance and can be successfully traded internationally.Consumer products in transition economies are gaining favor because of competitive pricing.There are substantial opportunities for technology transfer.

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Reasons for State-owned Enterprises

The reasons for the existence of state-owned enterprises in emerging market economies are:

Increased national securityIncreased economic securityThe investment is too large for the private sectorGovernments rescue failing private enterprises by placing them in government ownershipState-owned firms are more socially-oriented than private firms which are more profit-oriented

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State-owned Enterprises and International Business

The three types of activities where firms are likely to encounter state-owned enterprises:

Market Entry

The Sourcing orMarketing Process

InternationalCompetition

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Drawbacks to State-owned Enterprises

Competition is restrained, which results in lower quality of goods and reduced innovation.The international competitiveness of state-owned enterprises declines, resulting in the need for government subsidies.Many government-controlled corporations are losing money because the focus is on job allocation rather than business.

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Reasons for Privatization

Through privatization, budgets can be reduced and more efficient services can be provided.Goods and services can be more competitive and innovative.Experience indicates that private enterprises outperform state-run companies.Privatization attracts foreign investment capital.Governments can use proceeds from privatization to help fund other pressing domestic needs.

Advantages of investing in emerging markets:

Growth: The biggest advantage of emerging market Investments is the potential for high growth.

Diversification: International investments can be a good diversifier for your investment portfolio because economic downturns in one country or region, including the U.S., can be offset by growth in another.

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Risks of emerging market investments:

Experts often categorize emerging market risk in three ways:

•Political risk. Emerging markets may have unstable, even volatile, governments. Political unrest can cause serious consequences to the economy and investors.•Economic risk. These markets may often suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies. All of these factors can present challenges to investors.Currency risk. The value of emerging market currencies compared to the dollar can be extremely volatile. Any investment gains can be potentially lessened if a currency is devalued or drops significantly.

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Privatization Opportunities for

International FirmsExisting firms can be acquired at low cost, often with governmental support through tax exemptions, investment grants, special depreciation allowances, and low-interest credits.Since wages are low in countries where privatization takes place, there is more opportunity to build low-cost manufacturing and sourcing bases.The international firm can act as a catalyst by accelerating the pace of transferring business skills and technology and by boosting trade prospects.

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The Less-developed Markets

The less developed markets in the world include countries in:

AfricaAsiaEastern EuropeLatin Americathe Middle East

The emergence of these markets presents a great opportunity for citizens and companies alike.

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The World Economic Pyramid

Annual Per Capita Income Tiers World Population

More than $20,000

$1,500 to $20,000

Less than $1,500

75 to 100 million

1.5 to 1.75billion

4 billion

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Multinational Firm’s RoleMultinational firms have experienced a high rate of success when entering transition economies for several reasons:

They tend to enter sectors that allow high profit potential with minimal capital investments.They increase in size only after they gain experience and knowledge of the local markets.The governments in transition economies award special privileges to multinational firms.As multinational firms mature in these economies, the domestic market itself becomes a market opportunity.

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World-class Competition

Many economies now recognize that they must be world class competitors in order to develop businesses.

Domestic firms enter into joint ventures with global firms to tap into their knowledge base and success.

This can be difficult, given that domestic firms rarely have significant capital to contribute.

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