Emerging markets(developing economies) mostly third world countries, are little known in this global economy because of their moderate economic scale and their negligible impact on the world economy in this new age of globalization. Even though emerging markets are known to be developing economies mostly located in third world regions and states, these markets have been the ideal destinations for investors who have now come to realize the importance of these markets to the global economy. Over the past decade, Brazil, India, Russia, and China (BRIC) has been the most noticed and talked about developing economies making a tremendous impact in the global market, some of these countries in some cases have been perceived to be major players among the world’s largest economies.
When we consider an economy or market to be an Emerging market, there are several factors that constitute this status— currency value, population, GDP per Capita, socio-economic development level, Infrastructure, and Inflation. Some of these factors could act as stimulants to the positive growth of a potential emerging market. Most developing country in Asia, Africa, South America and in some cases the middle east, does exhibit these traits but are most often neglected based on the idea that they are third world countries whose footprints on the world economy is minimal.
Globalization has made it possible for emerging markets in this global economy to gain unlimited potential of becoming part of the engine of growth among the economic powerhouses around the world. Emerging markets are now becoming well known and recognized in some aspects as influential components in this global market whose contributions and commodity exchange create a positive impact on other first world economies. Based on these advancements, foreign investors are moving away from their saturated home markets to seek other profitable ventures in regions like Africa, Asia, and South America.
This is partly because business environment in these Emerging markets has become more business-friendly by way of Tax benefits to investors, massive profit potential due to population and customer demand for products, economies of scale, managerial urge, technological and infrastructure advancements, and easy excess to foreign market opportunities.
When it comes to Tax incentives, some foreign governments in emerging markets make provisions for investors through tax benefits in order to create and retain job creation in their economy. Trade agreements among emerging markets and developed markets have contributed to the evidence that tax incentives are part of the mechanisms that attract many foreign investors to either establish subsidiaries or relocate to emerging markets. According to Morisset, “It is no coincidence that in 1985–94 foreign direct investment grew more than five-fold in tax havens in the Caribbean and South Pacific. And Ireland’s tax incentives have been recognized as key in attracting international investors over the past two decades.
Moreover, in recent years there has been growing evidence that tax rates and incentives influence the location decisions of companies within regional economic groupings…”(2003). These tax incentives policies are being practiced by some emerging markets that find the need to attract foreign inventors into their economy.
Tax incentives are not the only influential components of foreign investment in emerging markets. The economies of scale factor─ the benefits that a business or investor derives from expanding into other markets; also plays a major role in incentivizing investors to move from their saturated and competitive local markets into emerging markets that will create a demand for their products.
Emerging markets sometimes provides investors and businesses with the option of expanding and becoming multinational companies by way of establishing subsidiaries or entirely relocation to a new market where there is the demand for their products. Expansion into other markets economies does provide an investor with the option to diversify its resources to other markets where the potential of increasing their market share are high and limited the risk of a potential loss of resources in a single market.
Emerging markets in most cases, create an environment where investors and business can set a profit and growth goals due to the large and diversified customer base mostly present in emerging markets. The goal of every foreign investor is to generate profit and growth, this goal is most often realized in some potential emerging markets whose business climate promotes such growth and profitability. Emerging markets are also known to be a destination for young labor forces.
Labor and other overhead cost are comparatively cheaper in emerging markets and this sometimes adds to the profitability and potential growth a new business in emerging markets. Many companies like Nestlé, Phillips, and Vodafone all saw their profits rise in due to their expansion into emerging markets. “Led by the rapidly expanding economies of Brazil, China, and India, as well as countries in Eastern Europe, Asia, Latin America and even Africa, investor appetite for higher return investments has led to a newfound interest in emerging markets. The continuing policy of lowering taxes, privatizing government-run companies, and giving incentives to entrepreneurs has been instrumental in the rapid economic growth in these regions”(Katsman 2011).
Technology is a major driving force in this new age of globalization. Much of the global economies are now within easier reach more than before. Emerging markets are now catching up with the technological advancements that use to be limited to developed economies for the past decade. Based on this positive shift, governments in emerging markets are creating and developing ways to tap into the technological advancement of the first world economies by way of investing in technological institutions within their economies.
This adds to the reasons why merging markets are becoming potential emerging of growth within the technological realm of the global economy. According to Segran, “Until recently, growth in emerging markets was predominantly driven by execution capabilities. Today, this is undergoing a paradigm shift, says a top executive with a leading Indian IT company: this growth engine is increasingly being driven by innovation…Emerging markets today, says Shibulal, provide three key opportunities: new growth markets, talent hubs, and innovation hubs. These are not the threats to developed countries as they are commonly perceived to be – but opportunities that need to be leveraged…” (2011).
Emerging markets provide business with another option of having to sell their products all year round. The life cycle of a product is prolonged when a business establishes foreign subsidiaries in emerging markets whereby products that are out of season in one market could be sold in another market where the product might still be in demand. This is a strategic move been adopted by business and investors who wish to extend the life of their products. Emerging markets are normally a great source for such business ideas to be executed swiftly because these markets most often have different seasons than that of the investor’s home market and therefore creating another market to products which may have completed its life cycle in an investor’s home market.
Aaron Katsman, http://seekingalpha.com/article/266312-emerging-markets-profit-from-outside-the-u-s
Jacques Morisset. http://rru.worldbank.org/documents/publicpolicyjournal/253Moris-020603.pdf
Grace Segran, http://knowledge.insead.edu/innovation-emerging-markets-110112.cfm?vid=515
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