Dvanced Economies, Developing Economies and Emerging Markets
Advanced economies are highly industrialised countries having high per-capita earnings, aggressive industries and highly-advanced industrial infrastructure. Developing economies are low-earning nations characterised by limited industrialisation and stagnant economies. Emerging market economies are growing economies which have increasing industrialisation, modernisation and fast financial growth. The advanced economies are highly visible with a high level of industrialisation.
Table of Content
Advanced Economies
Having reached the maturity stage of industrial development, advanced economies have shifted from being manufacturing economies to primarily service economies. Home to approximately 14% of world’s population, these economies have long ruled the international business. They account for approximately half of the world’s GDP and over half of world trade in products, and 75% of global trade in services. Advanced economies have democratic, multiparty structures of government.
Their financial structures are primarily based on capitalism. They have high purchasing power with few regulations on international trade and investment. They host the world’s biggest MNEs. An example is Ireland, which has one of the world’s first-rate performing economies and per-capita profits better than a lot of its European neighbours.
Developing Economies
Consumers in developing economies have low discretionary incomes. The proportion of their individual earnings that they spend on purchases apart from food, clothing, and housing could be very limited. Approximately, 17% of residents in growing economies stay on much less than $1 per day, and about 40% stay on much less than $2 per day. The combination of low earnings and huge start costs has a tendency to perpetuate poverty in the international locations. Developing economies are occasionally referred to as underdeveloped nations or third-world nations.
However, these phrases may sound offensive to residents of such nations. The growth of developing economies is hindered because of excessive infant mortality, malnutrition, reduced lifestyle expectancy, illiteracy, etc. Governments in developing economies are significantly indebted. There is also a lack of adequate health care.
For instance, much of Africa’s poverty is the result of government regulations that discourage entrepreneurship, trade and investment. Bureaucracy and red-tapism in growing economies deters international companies from collaborating with domestic companies. If countries do not engage in global trade and economy, the end result is increased poverty and unemployment. Poverty and unemployment are situations which can provide lead to terrorism and war.
Emerging Market Economies
Perhaps, the most striking feature of emerging market economies is rapid improvement in living standards and a growing middle class with growing economic aspirations. Emerging market economies also act as export destinations where Foreign Direct Investment (FDI) and deliveries increase. The level of economic prosperity varies in emerging economies. In emerging market economies, there are usually two parallel economies, in urban and rural areas, respectively.
Urban areas tend to have more developed economic infrastructure and consumers with greater discretionary income in comparison to rural areas. Transition economies are a subset of emerging markets that evolved from centrally planned economies into liberalised markets. Privatisation has provided various opportunities to foreign firms to enter transition economies by purchasing former state enterprises.
In Eastern Europe, Western companies are leveraging inexpensive labour and other resources to manufacture products for the purpose of exporting. Emerging markets account for more than 40% of world GDP. Also, they represent more than 30% of exports and receive more than 20% FDI. The emerging markets collectively enjoy an average annual GDP growth rate of around 7% which is a remarkable feat.
While the economies of most emerging markets were disrupted by the global recession and financial crisis, their average growth rates have remained strongly positive. Emerging markets possess numerous advantages such as presence of low-cost labour, presence of knowledgeable workers, government support, low-cost capital and powerful and highly networked conglomerates.
Attractiveness of Emerging Markets for International Business
Emerging markets are quite appealing to international companies primarily because they usually grow faster than developed economies with higher rates of interest and growth. The emerging markets are attractive for international business due to various reasons discussed in the upcoming sections.
As Target Markets
Emerging markets have turned out to be target markets for a huge variety of services and products. The biggest markets have doubled their proportion of global exports to these markets within the last few years. Exports to emerging markets account for one-third of the overall product exports from the United States. The developing emerging markets have growing demand for numerous consumer merchandise including electronics, automobiles, fitness care and so on. Businesses in emerging markets are important targets for sale of equipment.
For example, there are massive markets for fabric equipment in India, for agricultural equipment in China, and for oil and fuelling exploration equipment in Russia. Similarly, governments and country establishments in emerging markets are primary targets for the sale of infrastructure-related services and products including machinery, power transmission, transportation equipment, high-technology merchandise and other products that countries with low-levels of development need.
As Manufacturing Bases
Firms from Japan, Europe and the United States, and many other advanced economies have invested huge sums to expand manufacturing facilities in emerging markets. These emerging markets are home to low-wage and high-quality labour for production and assembly operations. Some emerging markets have massive reserves of raw materials and natural resources.
South Africa is a key source of industrial diamonds. Brazil is a major centre for mining of bauxite. South Africa is a key supply for industrial diamonds. Brazil is a centre for mining bauxite. South Korea’s Samsung is the world’s biggest electronics enterprise and the main manufacturer of semiconductors and flat display TVs. It has replaced Sony (Japan) and Motorola (USA) in these industries.
As Sourcing Destinations
In recent years, corporations have been seeking ways for transferring or delegating non-core tasks or operations from in-house teams to specialised contractors. This business trend is known as outsourcing. Outsourcing is the process of acquisition of selected value-adding activities, together with production of intermediate product or finished products from independent suppliers.
Outsourcing helps foreign corporations become a lot more efficient, concentrate on their core competencies and gain a competitive advantage. When sourcing depends on foreign suppliers or production bases, it is referred to as global sourcing. Emerging markets have served as important sourcing platforms. Various MNEs have established call centres in Europe, India and the Philippines. Investments from abroad benefit emerging markets as they result in job creation, production capability, transfer of technology and know-how, and linkages to the global marketplace.
Potential of Emerging Markets
Situations such as restrained data, unreliable information, or the excessive price of carrying out market studies usually make it hard for western companies to estimate the real market capability of emerging markets. Often companies may need to improvise. There are three important statistics to estimate market potential, which are per capita income, size of middle class and market potential indicators. Let us discuss them as follows:
Per-capita Income (as an Indicator of Market Potential)
When comparing the ability of individual markets, managers usually begin by analysing the aggregate national data such as Gross National Income (GNI), Per-Capita GDP, expressed in terms of a reference currency such as U.S. dollar.
Purchasing Power Parity (PPP) is an adjustment for expenses that presents the amount of products that consumers should buy in their home country using their domestic currency. However, per-capita GDP translated at market exchange rates presents an inappropriate image of market ability as it does not consider the large fee variations among advanced economies and emerging markets. Prices are generally lower for various services and products in emerging markets.
Another way to demonstrate the PPP concept is the Big Mac Index promoted by The Economist. This Index first gathered information about the price of hamburgers at McDonald’s outlets worldwide. It then compared the costs primarily based on real alternate costs to the costs based on the PPP price of Big Macs to evaluate whether a country’s currency is undervalued or overvalued.
Even if the per-capita income is adjusted for PPP, the managers must be cautious while considering it as the sign of an emerging economy.
There are four reasons for maintaining this caution as follows:
- First, official records do not account for the economic transactions in informal economy that are not officially recorded and are therefore not included in the Government’s calculation of GDP.
- Second, the majority of the population is on the lower end of the income scale in emerging markets and developing economies.
- Third, household income is drastically larger than per-capita profits due to multiple salary earners within the individual families in international locations. Multiple income families usually spend more electricity than individual incomes. This reality is not included in the records that lead to per-capita GDP.
- Fourth, governments in international locations might also additionally underreport country wide income so that they can qualify for low-interest rate loans from global agencies and development banks.
Middle Class as an Indicator of Market Potential
In every country, the middle class represents the section of humans in between the rich and poor. They have financial independence; work in different areas such as businesses, education, government, and hourly jobs; and consume various products such as electronics furniture, automobiles and entertainment.
Middle-income families constitute the largest share of families in advanced economies. In emerging markets, the scale and growth of the middle class functions as an indicator of a dynamic marketplace economy. Demographic traits suggest that, within the next few decades, the percentage of middle-class families in emerging markets becomes larger with increasing spending power.
Market Potential Indicators
There are eight dimensions that are chosen to represent the market potential of a country on a scale of 1 to 100. These dimensions are measured using market potential indicators and are weighted for determining their contribution to the overall Market Potential Index (MPI).
Risks and Challenges of Doing Business in Emerging Markets
Emerging markets face multiple risks that affect their viability for global business. Let us discuss these challenges.
Political Instability
The absence of dependable governance from the government provided to business increases risks and decreases the managers’ ability to forecast business situations. Political instability is related to corruption and criminal activities that discourage incoming investments and the development of a dependable business environment. Bureaucratic practices usually favour well-connected and home-grown firms. Such factors discourage the confidence of international investors.
Weak Intellectual Property Protection
The Intellectual Property Rights are not very well-protected in emerging markets. Even when IP property exists, laws that guard intellectual property rights, might not be enforced. In Argentina, for example, enforcement of copyrights on recorded music, videos, books, and laptop software program is inconsistent.
Authorities try to prevent shipments of pirated merchandise; however, insufficient sources and slow judicial methods delay enforcement. Laws related to Internet piracy are ineffective. Counterfeiting, which is unauthorised copying and manufacturing of a product, is common in China, Indonesia and Russia. Products counterfeited include software programs, DVDs and CDs. In India, vulnerable patent legal guidelines regularly discourage international investment.
Bureaucracy, Red Tape and Lack of Transparency
Cumbersome administrative regulations and excessive requirements for licenses, approvals and office work lead to delays in business activities. In China, getting a bank loan is a difficult task, specifically for smaller companies. There are many bureaucratic authorities due to which it takes several months to get clearances or licenses from authorities.
As a result, many companies are not able to acquire loans authorities. As a result, many companies are not able to acquire loans in a timely manner delaying their ability to develop and flourish. While small companies contribute about 60% to China’s GDP, they get less than 15% of loans.
Excessive bureaucracy is normally related to loss of transparency suggesting that political structures might not be open and responsible to the public. Where anti-corruption legal guidelines are weak, managers can be tempted to offer bribes to make certain that the enterprise deals are fulfilled. In Transparency International’s rating of the most corrupt nations, emerging markets such as Russia, Venezuela and the Philippines are having high levels of corruption.
Partner Availability and Qualifications
International companies must enter into alliances or partner with local companies in countries that have inadequate legal and political frameworks. Through these partners, the international companies can access the local market knowledge, build supplier and dealer networks and establish contacts.
Dominance of Family Conglomerates
Many emerging market economies are dominated by family-owned businesses rather than publicly owned businesses. A Family Conglomerate (FC) is a large group of privately owned organisations. FCs function in multiple industries including banking, insurance, production, etc.
Samsung is possibly the most well-known Korean FC. FCs enjoy diverse competitive benefits in their domestic country such as protection and aid from authorities, large networks in diverse industries, advanced market knowledge, and access to capital. An FC’s growth depends on its unique relationship with the authorities that protect it through measures such as loans, tax incentives and limiting competitor’s access to markets.
The FCs offer large tax amounts and facilitate the national financial development, which is a reason why governments help them. FCs dominate the economic landscape in most emerging markets which means that these FCs can act as both formidable competition and capable partners with plenty of bargaining power.
Strategies for Successfully Doing Business in Emerging Markets
Foreign corporations need to devise innovative strategies to be successful. There are three major strategies that firms employ to be successful in emerging markets. These strategies are explained in the subsections.
Partnering With Family Conglomerates
Family Conglomerates (FCs) are key players in their respective economies and they have a lot of money to spend on new ventures. Many FCs also own massive distribution channels. They have a deep knowledge of nearby markets and customers. For international companies, that need to enter emerging markets, the FCs are considered as important partners. An overseas company can partner with an FC to achieve the following:
- Lower the risks, time and capital requirements of getting into the market
- Expand relationships with governments and other key players
- Target market possibilities
- Overcome infrastructure-associated hurdles
- Leverage FC assets and nearby contacts
Marketing to Governments in Emerging Markets
In emerging markets, government companies and country-owned firms are a critical client institution for the following reasons:
- First, governments purchase big quantities of products (which include computers, furniture, workplace supplies, and motor vehicles) and services (which include architectural, legal and consulting offerings).
- Second, public firms purchase items and offerings from overseas companies in regions like railways, airlines, banking, oil, chemicals and metal.
Emerging market governments often announce tenders, a formal way of buying products or services. A tender is also called a Request for Proposal (RFP). Governments in emerging markets frequently formulate monetary improvement plans and annual packages to construct or enhance country wide infrastructure.
Securing government authorities contracts requires significant abilities and resources. Firms competing for such tenders bring together a group of managers and technical experts while pursuing big offers. Governments choose vendors after thorough evaluation.
Skillfully Challenge Emerging Market Competitors
The new worldwide challengers enjoy diverse strengths that cause them to be ambitious competitors consisting of low-price labour, professional workforces, authorities support and family conglomerates. Initially, managers conduct studies to build their knowledge of brand new challengers.
It is essential to research the benefits of the emerging companies and the way they are remodelling enterprises to achieve benefits in the target markets. The subsequent step is to gather new abilities that enhance the firm’s competitiveness. Many advanced economy companies associate with family conglomerates in emerging markets for essential value-chain activities along with R&D, manufacturing, and technical support.