Tapping New Sources of Wealth, Prosperity and Opportunity
Updated: Feb 5, 2018
Propelling Investment in the Emerging Market Economies
By Vahd Nabyl Mulachela
Characterizing Emerging Market
While there is no fixed definition of what constitutes as emerging market, in the world of investment, an emerging market economy is often accepted as an economy in transition with prospective future. It counts as a country or a region of countries that experience shift from a stage of economic under-development to an advanced or industrialized status. This process of systemic transformation involves a great deal of internal economic reforms to improve the way of conducting business in a country.
Emerging market economies can have various forms and sizes. They can constitute a small country with high productivity and consumption, or a group of countries with enormous development potentials. Their geographic locations are varied. They can exist in any region: Asia Pacific, Europe, Americas, or elsewhere. However, they share certain similar characteristics: they are developing and reforming economies. In addition, their markets are open and "emerge" onto the global scene.
With such diverse forms and features, it is not surprising that economic giants like China and India are grouped in a same category as ‘emerging markets’ alongside much smaller economies such as Kazakhstan or other former Soviet Union states. These countries belong to emerging market category because they have embarked on economic development and reform programs. They aim to building accountability within their systems, to create foundation for stronger and more responsible economic performance levels.
These characteristics of emerging markets attract foreign investors. Transparent, efficient and growing capital market is highly desirable for anyone aiming to invest. Therefore, one way to determine an emerging economy is by viewing its capital inflow. A growing figure of foreign direct investment (FDI) to a country could be an indication that the country commands respect and gains confidence from the outside world. Ultimately, the country’s improving local economy can help it access funds needed to further develop its economy. Once the inflow of capital starts to fill into a country, its market rating will improve. The country’s stock market and investment rate will become more favourable for investors. These efforts of improving a country’s market rating are done collectively – including governments. Promoting the prospect and economic condition of a country can boost confidence of foreign investors to invest. However, foreign investors are not the sole target. Improving a country’s economic development in general can also increase the interest of local investors to spend their capital domestically. It means capital flights can be prevented.
How are emerging economies distinct from established developed economies? In several respects they have characteristics of advanced economies. Even though emerging economies generally do not possess the level of market efficiency and strict standards in accounting and securities regulation - especially when compared to ‘traditional’ advanced economies such as the G8 countries - emerging markets do typically have a physical financial infrastructure, including banks, a stock exchange and a unified currency. Their prospective and proven high productivity drive emerging markets throughout the world to commonly form a great segments of global economic powerhouses. Countries known traditionally as economic superpowers often rely on the capability of emerging market to help sustain economic world order and growth.
Identifying Emerging Market Economies to Invest
Who can actually assign a badge of ‘emerging economy’ to a country? Not every subject agrees on which countries belong to ‘emerging economy’ group; and which do not. For instance, the International Monetary Fund (IMF) and Morgan Stanley Capital produced two different lists comprising names of countries identified as emerging economies. Their contents are not identical. Standard and Poor’s, Dow Jones, as well as other rating agencies may come up with their own respective list of countries labelled as emerging economies in a specific time.
However, there are countries that are common to be found in those various lists. Several institutions consider these countries eligible to be regarded as emerging markets as of 2016: Brazil, Chile, China, Colombia, Hungary, Indonesia, India, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand and Turkey.
Other institutions may include other economies in the list. Argentina, Bangladesh, Bulgaria, Pakistan, Romania, Ukraine and Venezuela used to be in one list or more. The same with Czech Republic, Egypt, Greece, Qatar, South Korea, Taiwan / Chinese Taipei and the United Arab Emirates. This article does not aim to exclude or include a specific name. Each claim has its own discretion in considering which economies belong to emerging market category. Any economy can be removed from the list if the standard changed or if the condition altered.
Why Emerging Markets Matter for Investors
Does emerging economy matter? It may be so. If a market economy wished to continue growing, innovation and expansion are necessary. In this regard, emerging markets can serve as outlets for providing fuels to economic growth and innovation. For investors, an emerging economy provides space, labors, and resources for expansion. Emerging economy can serve, for example, as a new place for a new factory or for new sources of revenue. With sufficient stability, predictability and sources, emerging markets can absorb ‘excessive’ capitals from developed economies and utilize them to boost their productivity cycle.
Those investing in emerging markets tend to aim for gaining faster return. However, the risk attached to investing in emerging markets is considered greater than investing in well-established or developed economies. Greater risk of investing in emerging economies is due to externalities such as insufficient infrastructure, political instability, law enforcement challenges, and in some cases, competition faced by private companies with state-owned companies.
For an emerging economy as the receiving side, incoming investments are expected to help improve the conditions of domestic labor as well as managerial skills. An emerging economy that receives investment could also benefit from technology brought in by foreign capitals. As a place to establish new production base, an emerging economy normally also enjoy a rise of gross domestic product and lower development gap.
In a globalized world economy, the role of emerging economies is crucial.
Technology and Emerging Economy in a
A Nobel Prize-winning economist, Milton Friedman, once claimed that nowadays it has become possible “to produce a product anywhere, using resources from anywhere, by a company located anywhere, to be sold anywhere.” Simply put, trade and finance work naturally crossing borders.
Actually, economic globalization is not entirely a recent phenomenon. Trades and commercial activities crossing different country boundaries have occurred for centuries or even millennia. Roman Empire and the ancient Babylon knew many forms of long-distance trades, even though not at a global scale we are witnessing now. China and Arabia were linked through shipments and other forms of trades that pass South Asia and maritime Southeast Asia since ancient time.
What we know today as global currency has existed for a long time using different names and forms. Today most countries accept the US Dollar as global denomination, along with Euro and a handful of other currencies. Crypto currency came in more recently. In the past, certain coins also circulated widely around Southeast Asia, the Islamic world, and other regions to be used as a prototype of ‘global currency’. However, the scale and speed of innovation have never been so fast in history. Emerging market economies therefore have larger role in modern globalized world.
The Internet has further revolutionized the way society works. The way humans work, play and live is enormously changed. The way business works has changed too. The Internet once started in research labs. Nowadays it has become a system with a global reach. Its effects can also be felt globally. It provides new opportunities and challenges that almost no one can reverse. Including in a form that shapes new emerging economies.
According to the McKinsey Global Institute (MGI) in 2011, consumptions and expenditures based on activities related with the Internet had surpassed the size of global agriculture and energy sectors. In 2014, the Internet contributed to roughly eight percent of global GDP – or some US$ 6.3 trillion. Even though the impact of the Internet to the global trade and finance have spread unevenly between different regions and different circles of people, the impact continues to grow rapidly.
The Internet is but one example of the techs some labeled as disruptive due to their nature of bringing change that dismantles an existing economic establishment, and replacing it with a new one. It is a manifestation of an economic concept popularly known as ‘creative destruction’, which suggests that economic innovation drives business cycles. It implies an idea that the presence of new technologies, innovations and ideas, led to a reconfiguration of economic orders.
To some extent, technology “clears the ground” so that new wealth can emerge. It drives companies to transform their business models to survive. It opens doors for profits to follow new trends. A classic example is the revolution in the music industry, where cassette tape replaced the 8-track tape, before the former was also replaced by the use of the laser disc, and then compact disc, followed by the MP3 - and recently – web-based streaming services.
Some of these techs are related to the use of the Internet. To name a few, 3D printing, autonomous vehicles, and genomics are likely to speed up the destructive trend. As the physical world becomes more networked, the Internet of Things (IoT) is estimated to create around US$ 11 trillion in economic value by 2025. In public sector alone, the IoT is estimated to yield some US$ 4.6 trillion. That is not impossible since nowadays companies rely more on the Internet to interact with their stakeholders. These include their foreign suppliers, customers, as well as outsourcing their operations. Talents, inputs and ideas are also largely sourced from the globe via the web. The way business is conducted across borders is changing.
Emerging market economies such as India, Indonesia and China absorb this method of doing business to transform their outlook. Societies in the emerging economies view that there are more benefits of the Internet other than the economic ones. It allows channeling of expression, access to knowledge, and social and political engagements. New ideas flourished. Societies and values changed. Lower costs of communication has opened the possibility for creating new types of virtual communities. Networks grown to span the globe. It means new pattern of work is forming, including in forms of collaboration.
The coming of the Internet also require governments to be transparent and accountable to their citizens, and relationship between governments and their “netizens” needs to be defined.
However, countries differ in their economic successes. Their economic achievement disparity is partly because of their different institutions. Their rules and regulations influence how the economy works, and the incentives that motivate them. Some countries realize this and take necessary steps and risks to embrace change. They grow as emerging economy because they provide access and resources. Their entrepreneurs are able to access sources of finance, to borrow from banks and financial markets. Youths in countries without entrepreneurial initiative, creativity, proper education to prepare them for skilled works would be difficult to establish strong economy. Meanwhile, a society with good education, incentives that encourage youth to exert efforts and excel in their chosen vocation, would be rewarded in a market economy.
These characteristics may be useful for anyone considering to invest in emerging economies.