Emerging Markets as a Source of Disruptive Innovation - Essay Example

 Emerging Markets as a Source of Disruptive Innovation Business Context The triad countries refer to the European Union, Japan, and the US, which comprise the economic powerhouses of the world. These countries have a great influence on the economic and political aspects of the world. On the other hand, BRIC countries refer to Brazil, Russia, India, and China. The name BRIC was coined up by the Goldman sacks, a leading global investment bank. Primarily, the countries of the BRIC have the fastest growing economies in the world currently. In addition, the total population of these countries have accounts for almost half (3 billion) the total population of the world (Economy Watch 2010). Both the triad and the BRIC form the G20, which represents the twenty largest economies of the world. By the year 2020, all the countries of the BRIC are expected to belong to the ten largest world economies. However, among the BRIC countries, China is expected to be biggest of the four (economy watch 2010). During the next forty years, the GDP of the G7, which form the triad, is expected to grow at an average rate of 2.1 percent per annum. However, the GDP of the triad is expected to grow at an average rate of 6 percent per annum during the same period (Dadush and Stancil 2009). The slow growth of the GDP of the G7 will lead to a reduction in its share of the GDP from the current (as at 2009) share of 72.3 % ($ 27.7 trillion) to 40.1 % ($ 64.7 trillion) in 2050. However, the GDP of the BRIC and Mexico will grow from their current (as at 2009) share of 18.7 % ($ 7.2 trillion) to 49.2 % ($ 79.4) ( Dadush and Stancil, 2009). The change in the share of the GDP of the triad countries will lead to a shift in the power of the triad to the BRIC. The BRIC will control most of the economic and political aspects of the world since in addition to having the largest economies these countries will have a sizeable proportion of the world’s population. The effect of the power of the BRICs has already started being felt around the world. Primarily, the BRICs have recovered effectively from the global recession and they are expected to form the largest proportion of the world’s consumption now and in the future (Yamakawa, Ahmed and Kelston 2009, p 1). The BRICs and particularly china have already started challenging the triad in the area of research and development, which is known to fuel economic and political growth of a country (Narendra 2010). In addition to this, they have tremendously increased the ratio of their funding to research and development compared to their GDP. At the same time, the global recession is forcing the triad countries to reduce their funding for research and development. Some of the BRIC members are already thinking of forming not only an economic alliance but also a political alliance (Rozhnov, 2010). Overview of the UK business environment The UK economy is the seventh largest economy in the world with a GDP of US$2.2 trillion; this makes UK the second largest economy (after Germany) in Europe (Euromonitor global market research 2010). In addition, the UK has a population of 61.8 million and a population growth rate of 0.7 % per annum (as at 2009) (World Bank 2010). In the recent years, the economy of the UK has been on a downward trend due to the economic recession. However, in 2010, the economy rebounded and the GDP started posting growth; indeed, in the third quarter of 2010, the GDP grew by 0.8 percent as opposed to the third quarter of the previous year where the GDP growth was negative. The economy of the UK is expected to grow by 1.25 % in 2010 and 2.25 % in 2011 due to an improvement in the trade of the country (UK National statistics, 2010). However, the growth is expected to be between 2.25 and 3 % for the period between 2012 and 2015 (Lewney and Hay, 2010). Moreover, the UK has a stable currency (the pound) and the government has put in place policies to ensure the stability of the currency (Global alliance of SMEs, 2010). The main sectors that support the UK economy are manufacturing, finance and business services, telecommunications, and agriculture. Most of the UK companies are globalized, hence their operations can be found in all corners of the world. Moreover, most of these sectors have been severely hit by the global recession, while at the same time they have been experiencing a negative growth in the recent past. The UK is technologically more advanced than most of the countries. It also has among the best IT companies in the world and its universities are among the best universities in the world, which offer technology related courses (E-skills UK, 2008). The high input of the UK into research and development enables it to come up with technological advancements, which help it to effectively compete with other countries. The main exports for the UK in 2009 was medicaments (medical related products) followed by the petroleum products (Stoddard 2010). Other products exported by the UK include aircraft and associated equipment, telecommunication equipment, chemical compounds and machinery equipment. The UK has among the most skilled workforce in Europe and boasts of having among the best universities in the world, which provide high quality education. The current employment rate of the UK for the people aged 16 and 64 is 70.8 % (for the three months up to September 2010). During the same period, the unemployment rate was 7.7 percent. However, the slow economic growth is projected lead to an increase in the unemployment level up to around 2015 (Lewney and Hay, 2010). How the UK is affected by the BRICs and emerging economies The economic recession of the year 2008 has largely affected the economic sectors of the UK. The recovery from the recession has been very slow. The slow recovery also extends to the other triad countries. However, the countries forming the BRIC were generally not adversely affected and they have since recovered to post impressive economic growth. The slow economic growth of the UK and other triad countries is expected to continue leading to the presence and the power of the BRICs being felt even more. The BRICs are slowly building their way into being economic giants of the future. The effects of the BRICs are being felt in all areas of the economy. Effect of BRICs on the UK economy The BRICs affect the economy of the UK largely; the emerging market, which mainly comprises the bricks, offers a large demand for the goods, which are produced by the UK and other countries of the triad (PWC UK 2010). This has made several businesses to venture into the areas so as to seek growth. In addition, the BRICs generally have low costs of production compared to the other countries (PWC UK 2010). The low cost of production coupled with the high demand in the BRICs is an enticement, which many companies cannot resist, and they are therefore likely to relocate to the areas so as to benefit from the factors. The relocation of the companies to the BRICs is likely to cause several economic problems to the UK. The relocation will lead to the increase in the rates of unemployment, as there would be fewer companies to employment the available workforce. In addition, the relocation would also lead to reduced revenue of the government in form of taxes and excise duty. These are just a few of the problem, which may be caused by the large-scale relocation of the companies. However, the relocation of the companies to the BRIC will only help in fueling their economic prosperity further by providing employment to their workforce. The relocation will also lead to an increase in the revenue of the countries providing it with enough resources to undertake other projects, which promote economic growth, e.g. infrastructural development. The shift to the emerging markets has already started taking place with many companies investing in the areas to take advantage of the growth in the BRICs. An example is the Weir group, a UK engineering company based in Glasgow, which acquired BDK engineering industries, an Indian company which manufactures valves (Powerhouses: the rise of emerging markets 2010 part 4). The UK companies are expected to get a sizeable proportion of their revenue from the BRICs and emerging markets in the future. Figure 1.1 Proportion of companies’ revenue from emerging markets (source: Survive and prosper: emerging markets in the global recession. UK Trade & Investment p 19). Political impacts of the BRICs on UK Economic recession of the UK has forced the government to formulate legislature, which will lead to decrease in the government spending and an increase in the tax of that the government charges. Moreover, there has been a change in the government with the government coming into power when the problems of the economic recession were still taking place. The increase in the VAT from 17.5 to 20 percent is likely affect the price of the products, which attract VAT (Elliott and Wintour, 2010). This would lead to an increase of the price of the products which the UK produces hence making some of the consumers to buy goods from emerging markets which are relatively cheaper. The government policies, which are targeted to benefit the country in the short term, may in the long run be detrimental to the wellbeing of the UK, hence enabling the UK to be outpaced by the BRICs. Social impacts of BRICs on the UK The population of the UK regards highly the green issues of products. Several brands have been able to attract more customers due to their environmental friendliness. Currently the UK customer emphasizes on the sustainability of the companies, which produce different brands (Beattie and Wood, 2009, p 3). The UK companies ensure that they are sustainable so as to build their brand names. However, the BRICs do not ensure the sustainability of the brands since they currently do not have the capital to invest in the projects to ensure the sustainability of their products. The life expectancy of the UK has very high life expectancy (77.7 years); the proportion of the aged people (people over 65 years old) is also high at 16 %. This proportion is expected to increase and by year 2034 to 23 percent. The aged are usually people who are generally not in active employment and are a liability to the government due to the pensions and social security services, which the government has to provide for them. This therefore implies that the UK will not have enough manpower to fuel the economic growth and overcome the problems faced due to the BRICs. Technology impacts of the BRICs on the UK The UK has advanced technologies compared to the BRICs. The technology enables the UK to produce high quality products compared to the ones produced by the BRICs. Due to the high quality of the products, the price of the products is also high compared to the other products, which are of lower quality. However, the BRICs and especially china have been the source of disruptive technology. Disruptive technology is a technology which as literary the market due to its pricing, quality and features which are made to target a specific group. These products are generally cheaper but with limited capabilities compared to the other products. A good example is the Swach, an eco-friendly friendly portable water supply system made by the Tata group of India. This product is far much cheaper (half the price) than the product made by its competitor, Unilever, a UK based company (Bhan 2010). The disruptive innovations of the BRICs though being of lower quality tend to have high demand due to their pricing. These innovations tend to out-compete the products made by the other companies, which are mainly in the triad. These companies are at risk of collapsing if they do not come up with effective mechanisms to ensure their sustainability (Cassiolato and Votorino, 2009). Conclusion If the continued conditions persist, the dominance of the BRICs is certain to take place in the near future. These countries will have control over most of the aspects of the world and will yield so much power in their combined form. Therefore, this would reduce the influence of the triad and in particular, the UK. For the UK to be considered powerful, it will have to combine with the other countries in the European Union to undertake any practice for it to be seen as powerful. Even then, the combined GDP of the countries of the European Union would still be far much less than the combined GDP of the BRICs. The dominance of the BRICs is therefore disadvantageous to the UK. The dominance of the BRICs is likely to affect almost all the sectors of the UK society. However, the sector that is expected to be worst affected is the technological sector mainly because it relies heavily on the funding for the research and development. However, lack or reduction of the funding is likely to adversely affect it. The BRICs are expected to have large amount of resources, which they can use for the funding of their research and development. Even though the dominance of the BRICs is likely to affect the sectors of the UK society, the financial service industry is likely to be the biggest beneficially of the dominance of the BRICs. This is because, different banking institutions would be able to penetrate the markets of the BRICs effectively due their experience in banking, and due to the fact that the UK banks are renowned globally. Appendix The GDP growth of the BRICs is expected to increase considerably. The GDP of China is expected to increase by 9.6 percent in 2011 whereas the GDP of India is expected to increase by 8.4 percent in 2011 (Wagner 2010 part 3). This increase is by far much bigger than the increase in the other countries which are still struggling with the effects of the global recession. The governments of the BRICs are implementing necessary measures to ensure that they can sustain the growth and counter any problems that may occur. The Chinese government is taking measures to prevent inflation as hence protect its economy (Wagner 2010 part 3). This will enhance their control of the economic power over the other countries of the triad. The shifting in the power to the triad has at many times been referred to as the waking of the sleeping giants. The rise in the BRICs can be credited to the efficient political and economic reforms which are undertaken by the countries. Just a decade ago the countries forming up the BRIC had several economic crises. Russia suffered a debt crisis which was triggered by the oil price depreciation, and Brazil suffered a major currency crisis (Power shift: The move from West to East 2010 part 5). Throughout history the economic power has also been held by the countries of the west and mainly Japan. However, during the ancient times China had vast economic power and hence by having a high GDP during to its economic growth it will be regaining its place in economic power. Figure 1.2: shift in the balance of economic power throughout history. (Source: Power shift: The move from West to East 2010 part 4) the availability of cheap labour and high demand in the BRICs is expected to lead to a shift in the power in terms of trade. The BRICs will become the world’s manufacturing powerhouse due to the factors mentioned above. There has generally been a decrease in the power wielded by the G7 countries in terms of trade. The BRICs current have excess foreign reserves due to the shifting in the power (Power shift: The move from West to East 2010 part 5) . (Source: Power shift: The move from West to East 2010 part 5) Reference List Beatie, G. and wood, I., 2009. What you can learn from E.On’s approach to sustainability. London, Landor associates. (Online). 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