Developed and emerging markets firm - Essay Example

? Developed and emerging markets firm Emerging markets or developing countries involve those countries with business and social activity in the situation of industrialization and rapid growth. For decades, these markets have given out some of the extremely exciting investment chances for investors globally. The rate at which urbanization is increasing has made a new consumer generation to come about having a strong passion for the development of infrastructure and consumer goods in support of their new lifestyles. This has made investors continue enjoying a season of returns that are exceptional over main classes of assets. To date, emerging markets have become the greatest global growth driver. This has given rise to a debate concerning why one has to invest in the emerging markets. There are many reasons that can make an investor to consider investing in these regions. This paper explores the reasons for developed and emerging market firms investing in each other’s home regions. The paper also explains why reasons of these kind and entry strategy availability differed for Foreign Direct Investment (FDI) in emerging and developed economies. An investor may invest in an emerging market in order to invest in a region that has displayed some considerable growth currently and in the future. These countries have a future that is foreseeable. Research done by the international monetary fund reported that the emerging economies have a two to three chance of growing faster than the countries that are developed. Such a narrative growth is extremely vital for investors that may fail to be clued on the bull trends of the prominent Wall Street. In many cases, corporate profits are observed to be growing at a rate that is fast whenever the economic growth of a country or region is high. For example, US companies have increased their profit margin in the last twelve months due to the growing non-US markets. Besides this, some public investors have still considered emerging markets as underweight especially in their portfolios. Additionally, the emerging economies provides increased diversification as they appear to perform differently than the markets that are developed. This is a significant benefit towards an investor. Emerging markets are also considered as markets that have succeeded in decoupling of the long term and biggest West mature economies woes. For example, the Market Stanley index is an emerging market that consist of Brazil, Argentina, Chile, Columbia, Egypt, Israel, Czech Republic, Hungary, Indonesia, India, Korea, Jordan, Mexico, Malaysia, Morocco, Peru, Pakistan, Poland, Russia, Taiwan, Venezuela, Thailand, South Africa, and Turkey (McAllister, 2006). In comparison to West countries, a number of emerging markets are normally well resourced, have a work force that is young and balance sheets that are strong. For example, India and China together have a population that is approximately three times that of the entire world. In this respect, markets that are emerging do represent about eighty six percent of the population of the world, seventy five percent of the landmass of the world, and about fifty percent of the growth domestic product of the world. In many cases, emerging markets, are displayed in different forms and sizes. In this respect, there are minimal similarities between the structures of finance and the returns drives on investments. For instance, financial systems and a highly developed economy like South Korea and the frontier markets have limited similarities. On the other hand, in emerging markets, the GDP per capita is normally higher than in the poorer developed countries. For instance, Taiwan and Korea have a per capita of about $22,000, which is a high ratio margin compared to a number of European countries (McAllister, 2006). However, some emerging markets have extremely low ratios like India. India has a GDP of about $ 1500. The countries of the frontier are considered to be extreme. Countries like Qatar and Kuwait states of oil are the wealthiest countries in the entire world. African states, on the other hand, have a GDP below $1000. In general, the merging growth is normally faster compared to worlds that are developed even though there are some small variations. For instance, there is a significant difference between Brazil and Russia, even though they derive their benefits from the increasing commodity importers and prices. Apart from this, the demographic factors in emerging markets are extremely positive compared to developed countries that have growing and young populations. This implies that emerging markets have a growing workforce in comparison to the declining workforce and the increasing ratios of dependency in the countries that are developed. This situation occurs in many frontier markets like in Africa that have the fastest and the youngest growing populations. Another key advantage of emerging markets is the developed systems of finance and the law rule that influences investment in emerging stock markets. Different countries have come up with a significant progress in their investments making them to score extremely high in the two sectors. For example, countries such as Hungary and Taiwan have made increased progress and have a high score in emerging stock markets. The main concern, in this case, has always been on governance and corruption in regions such as Russia and India. This was identified by lower valuations in countries that are corrupt and also gives out a chance for improvements, resulting into high valuations and standards. On the other hand, emerging markets have high liquidity. Different investors would prefer investing in markets that have more liquidity (International Monetary Fund, 2009). In a situation where the market is illiquid, investors would have an option of maintaining their focus on the companies that are large within the market or consider a holding period, which is actually long. Emerging markets have also remained extremely volatile compared to developed markets especially in times of stress. Other emerging markets have proved to possess deep domestic bond markets having curve yields that are fully developed. For instance, India and South Africa have yield curves that are developed whereas China has a shallow domestic market bond (Dorgan, 2006). FDI (Foreign direct investment) is an investment that is direct in a country’s production by another country’s company either through buying one company in the country that is targeted or by expanding operations of a business that is in existence within that country. There are many reasons for which FDI is pursued. Some of these reasons include taking advantage of wages that are cheap and privileges of specific investment like exemptions of tax given by the country as a reward towards a gained access to tariff-free markets of the region and the country. As a section of a country’s national account, and national income, Y= C+I+G+ (X-M) here I represent investment together with FDI. In this case, FDI involves the net investment inflow that is used in acquiring a management interest that is lasting within an economies’ operating enterprise. It involves a sum of equal capital, long term and short term capital in the payment balance (Dorgan, 2006). FDI is also involved in the process of management and expertise. In an ideal market, there are two categories of FDI. These include FDI stock that is the cumulative number for a certain period, and the outward and inwards FDI, which leads to a net inflow of FDI. The FDI global market has gone through a number of changes in the past years. These changes have been brought about by the multinational enterprise of emerging markets. Even though, the outward FDI from these markets fails to be new, level of development in emerging markets is high. The increase in the global OFDI in the past few decades is extremely remarkable. From 1980, the output FDI has grown by the magnitude of forty percent. From developed countries, the flow of direct investment has averagely grown due to the economic growth in key emerging economies. As a result of some financial challenges in the developed countries, the output FDI has dropped by about seventeen percent (Davis, 2006). The OFDI global environment of the developed and emerging markets has rapidly changed due to a number of reasons. Different factors of traditions such as the liberalization of the foreign direct investment worldwide regime, firm competition from different regions of the world, logistical and technological advancements, support and influence on global outside FDI flows in both the emerging and both developed markets. Other non-traditional factors could also affect the landscape of FDI (International Monetary Fund, 2009). From the macro perspective, there are different constraints of natural resource and the sustainable economic challenge growth. In the agricultural sector of the emerging and developed countries, the insufficient arable land and water has resulted into an increase in the FDI. Theses factor has a high chance of increasing their frequency hence affecting the FDI economic determinants. For the reconciliation of the massive global potential for the economic growth that is dynamic and limitation in the utility of resources, technologies that are new, new types of cooperation and global arrangements are needed (Cheng, 2007). The changes in the landscape of FDI in the period of the last four decades has resulted into a strong competitive pressure in the process of globalization. In this case, different firms have been forced to have an early internationalization. In other situations, these firms could be forced despite the fact that they have just been established (International Monetary Fund, 2009). This leads to a traditional view revision, in that firms should always internationalize slowly and follow a specific sequence which starts from exports. In emerging markets, the flow of the foreign direct investment has, for decades, been experiencing a tremendous growth. Such a significant growth was evoked by partly strong FDI growth from economies that have transited such as the Russian economic system (Deutsche Bank Research, 2009)Table 1 involves the foreign direct investment in emerging and developed economies. Table 1: Foreign direct investment. Region Year 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 World 51.5 240.1 1231.3 741.2 537.3 920 880.4 20146.4 1957.4 1845.9 Developed economy 48.4 227.2 1,093 665.7 484.3 507.1 786.3 743.2 1157.7 1809.4 Emerging market economy 3.3 11.9 134.8 83.1 49.5 44.0 119 116.1 214.4 285.5 Brazil 0.4 0.7 2.4 2.6 0.4 9.7 2.6 28.3 8.1 21.5 China - 0.9 10.1 6.8 2.5 2.9 5.5 12.4 22.3 51.2 India 0.0 0.0 0.5 1.4 1.8 1.9 2.3 3.1 14.4 17.5 Transition economy - 0.0 3.2 2.7 4.6 10.4 14.1 23.6 51.4 58.2 Russian federation - 3.2 2,5 3.6 9.8 13.8 23.5 46.1 52.5 Table 1 gives a clear evidence that regional foreign direct investment has been experiencing a number of changes (Davies, 2009). The main reasons for the considerable changes are the available entry strategies which differ in terms of Foreign Direct Investment (FDI) between emerging and developed markets. Even as, markets that are emerging have become relevant investors in a number of developing countries, these investors do invest increasingly in countries that are developed. Some of this investment is normally in services including the services of trade supporting. Resources that are natural could also be considered as vital outward investors. The total number of multinational enterprises (companies from the developing and developed economies) have displayed specific dynamic rates of growth from the year 2003. The observed growth was strongly driven by outward FDI transition economies growth. This is displayed clearly in table1. To date, the increasing number of emerging markets has failed to give out environment that is supportive for a number of output FDI activities of their firms giving them a situation of competitive disadvantage in the developing countries in relation to their country’s counterparts (Deutsche Bank Research, 2009). The prime challenge of policies in an investors home country’s emerging market is the creation of an environment and framework of policy which the domestic investments. Such a frame work enhances, countries competitive advantage making them to compete in an effective way at the global arena and secure the reward of output FDI for the investor’s home country. In this respect, the increased rise in the OFDI (outside foreign direct investment) from markets that are emerging is phenomena that need a deeper consideration. Whenever emerging markets become victims of the continuous lack of policies that are supportive, and are prevented from competing favourably in the world market, they may tend to move their base areas into different countries so as to remain competitive. Apart from this, policy making and government action could also be affected by economic realities such as scarcity in foreign reserves, limited resources, and potential concerns over the exports of jobs and capital (Cotula, 2009). The fact that developing countries lack a policy that is supportive is a contrasting idea to the situation in developed countries that have established a comprehensive and extensive framework policy. This means that policies, which have evolved in emerging markets compliment their own economic situation. The main effect, in this case, has been persistent and gradual diversion of the home country’s policy from control of OFDI and restricting it to the promotion and permission of the OFDI actively giving a reflection of identity that firms require to be globally competitive in a global market with OFDI as a prime competitive source (Kalotay, 2009). Different experiences of developed countries in establishing a framework of policy for the OFDI gives out lessons to makers of policies in countries that are developing. Out of the OFDI restrictions countries that are developed adapted policies that promote and shape OFDI (Fletcher, 2009). These measures can be grouped into about seven categories. These categories include, giving out technical support and information, fiscal incentives, guaranteed and investment insurance, financial support, nation champions support, agreement and international related investment concordats and development assistance that is official. If these factors could be adopted by emerging markets, then their FDI would be significantly improved. As the absence of the policy framework leaves firms that are domestic in a competitive constraint, altering of the situation does not come on a silver plate since it has its challenges. Lack of competence and domestic experience in developing countries and regulatory risk captures makes the lessons of emerging markets to be minimum in the form of policy and maximum in the form of management and other forms of argumentation human capital (Erixon and Razeem, 2009). A variety of information on the developed countries experiences and varied options of policy that are available is vital in markets that are emerging. Additionally, this information makes the sequence challenge of the policy continue being in existence. Research has shown that challenges presented by such shifts within the market are useful in markets that are emerging identifying the fact that multinational enterprises (MNEs) of emerging markets come as a result of globalization or could skip the developmental stages and internationalization. These countries have a greater access towards global market capital and importance which is reduced concerning the control of capital. Some policies lessons from developed markets have rendered the general internationalization and globalization of MNE in emerging markets redundant (Fagan, 2010). This implies that markets that are emerging rather than shifting from phase that is distinct to the other phase on the permission restrictions scale of promotion it should put together policy elements from different stages. The increase in outward investment of emerging markets gave rise to challenges in the policies for host countries. Some of this challenges include an increase in FDI protectionism, especially in a situation of markets that are emerging MNE giving out developed acquisitions in different countries. If an acquired firm becomes part of the sector strategies, concerns dealing with national security will be described as concerns of the host country. References. Cheng, L., 2007. China’s outward FDI: past and future. Retrieved on 4th December, 2012 from http://www.nber.org/books_in_progress/china07/cwt07/cheng.pdf . Cotula, L., 2009. Land grab or development opportunity? International farmland deals in Africa’, Columbia FDI Perspectives, 8, 10- 22. Davis, G., 2006. The responsibility paradox: Multinational firms and global corporate social responsibility. Michigan: Ross press. Davies, K., 2009.While global FDI falls, China’s outward FDI doubles, Columbia FDI Perspectives, 5, 11-23. Deutsche Bank Research., 2009. BRIC outward FDI: the dragon will outpace the jaguar, the tiger and the bear. New York: Oxford publishers. Deutsche Bank Research., 2009. China’s financial markets: a future global force and Current Issues. New York: Jack and sons publishers. Dorgan, B., 2006. How free trade hurts. New York: Oxford publishers Erixon, F., and Razeem , S., 2009. Fighting the urge for protectionism. Washington, DC: International Monetary Fund. Fagan, D., 2010. The U.S regulatory and institutional framework for FDI. Edward: Elgar press. Fletcher, R., 2009 .Environment and the World Trade Organization at Seattle: issues and concerns. Washington, DC: International Monetary Fund. Fujita, M., (2009). Impact of the financial and economic crisis on FDI. Geneva: UNCTAD press. International Monetary Fund., 2009. Global economic slump challenges policies: World Economy Outlook Updates. Washington, DC: International Monetary Fund press. International Monetary Fund., 2009. World Economic Outlook: Crisis and Recovery. Washington, DC: International Monetary Fund. Kalotay, K., 2009. Take-off and turbulence in the foreign expansion of Russian multinational enterprises. New York: Oxford publishers. McAllister, P., 2006. Foreign Direct Investment from Emerging Markets: The Challenges Ahead. New York: Palgrave Macmillan press. Read More