Opportunities Available for Firms in Emerging Economies - Coursework Example

Essay on “In The nехt dесаdе do firms from emerging markets have grеаtеr oрроrtunitiеs or grеаtеr chаllеngеs when cоmраrеd with firms from dеvеlореd markets?” Name Instructor’s Name Course Number Date Introduction The term “Emerging Market” refers to nations which have started industrializing but have not totally attained financial stability evidenced in developed markets (Cavusgil, Ghauri, and Akcal, 2012). Examples of emerging markets include countries like China, Brazil, India as well as South Africa. Business firms often like environments which favor their growth and consequently result to profit maximization, according to the theory of the firm. One of the most important factors that determine a firm’s level of success is the environment in which the business is being operated. Additionally, business firms look for opportunities in environments where there is prospective growth from all sectors, ranging from production. Therefore, most business firms’ eye for an opportunity in emerging markets where there is perceived growth (Lechner, 2009). However, though emerging markets offer a number of opportunities ranging from ability to use modern technology, diversification, availability of resources, perceived growth and new fiscal policies, there are quite a number of challenges as well. Investing in emerging markets is not a walk in the park as is the perception with most firms (Cavusgil, Ghauri, and Akcal, 2012). Investing firms in emerging markets face quite a number of challenges ranging from political instability, liquidity risks, currency fluctuations, cultural barriers and a much regulated business environment. All these limitations limit profit margins for some firms and lead to total bankruptcy for others (Lechner, 2009). Firms investing in emerging markets need to be financially sound and stable in order to endure various challenges at their disposal. This essay therefore aims at establishing the opportunities and challenges firms face in emerging markets as compared to their counterparts in developed markets, whilst also arguing out whether in the recent future opportunities will outweigh the challenges and vice versa. Opportunities available for firms in emerging economies Diversification Diversification involves redistributing business portfolios to lower exposure to business risk. Business firms in emerging markets have opportunities to diversify geographically, thereby offering protection to their portfolios because, mostly, global markets don’t have a tendency of rising and falling in tandem (Lechner, 2009). However, due to the dynamism in the business environment, some parts of the market can tend to negatively affect business operations economically. Therefore, diversification offers an opportunity for a business firm to shelter itself from negative effects experienced in some parts of the business market, hence fostering on business performance (Dobbs, Koller and Ramswamy, 2015). For example, during the 2008 world financial crisis, firms in the emerging markets didn’t suffer from much negative effects as compared to firms in the developed nations especially North America and Europe (Cavusgil, Ghauri, and Akcal, 2012). Potential for growth Globally, emerging economies or markets like China, India and Brazil have the highest rapidly growing economic rates. According to Alshawaf (2008), the increasing Economic growth is owed to benefits such as political stability and the willingness of the government to invest in education and health, thereby attracting investors because of the need to meet the requirements on the increasing population. Emerging markets usually have increasing rate of population as compared to developed markets. Therefore, with increase in population, there is a direct impact on demand, which forces an increment in demand of a commodity (Char, 2010). Because of the previous absence of luxury goods in emerging markets, people here tend to buy and consume more of luxury goods. This therefore turns out to be an opportunity for firms in emerging markets if production is tailored towards goods needed by most people in the entire market. Additionally, because of limited variety of goods to choose from, firms in emerging economies can capitalize on the scarcity to make their products appear as status symbols. The increased demand for goods and services offers an opportunity for firms to increase production, consequently boosting on profit margins (Dobbs, Koller and Ramswamy, 2015). Focus on New Technologies Firms in emerging markets have freedom of developing and implementing the use of modern technology like fiber, with the burden of management of infrastructure offloaded from them (Lechner, 2009). The greatest form of opportunity available to firms operating in emerging markets is that of the chance to develop and implement the use of modern technology. This is because the level of technological advancement in emerging markets is low as compared to that found in developed markets or economies. In fact, according to TNS, a market research firm, out of every five internet users found in Africa, four can be able to access the internet. Further the research, which was carried out in the year 2012, indicated that by the year 2016, mobile connections would experience an annual growth rate of about 21% (Hsiang, 2010). Similarly, to signify the opportunity available for firms in emerging markets, the Rwandan government in Africa aims to make its country an ICT hub by the year 2020 (Hsiang, 2010). Therefore, emerging markets offer platforms to explore on new technological advancements, consequently boosting on profitability. However, in as much as there is a chance to explore on new technology, the implementation progress is low. For example, India as one of the emerging markets has struggled big time to develop and implement digital form of infrastructure, with an aim to shift from 2G to 3G and even 4G (Raghavan, 2011). Readily available resources The availability of resources forms the basis of production for every business entity. In fact, according to Halepete (2011), the ease at which resources can be obtained determine the level of productivity to be achieved. Natural resources are found in plenty in emerging markets. Firms found in emerging markets are likely to register tremendous benefits due to the level of industrialization found in emerging economies. For example, Brazil as one of the emerging markets has sufficient oil at its disposal, and therefore firms eying an opportunity in such an emerging market have greater potentials of making huge profits (Ullah and Long, 2008). With availability of resources and consequent increase in productivity, higher levels of profitability are achieved. In contrast, resources in developed markets are not as readily available as in emerging markets, possibly because of the number of firms and the level of technological advancement evidenced in developed markets (Lechner, 2009). Adoption and implementation of fiscal policies Most of emerging markets have, in the past, suffered and endured various economic crises therefore leading to the proper institution of effective fiscal policies. For instance, Brazil has since 1994, made progressive moves consequently leading to reduced inflation rates to as low as 5.4% over the last five years (Ullah and Long, 2008). All these achievements are as a result of proper institution of fiscal policies. Firms operating in emerging markets enjoy a good business environment in terms of working fiscal policies that have been established in the economy. The stability in fiscal policies encourages growth which consequently result to increased productivity and profitability (Dobbs, Koller and Ramswamy, 2015). Challenges faced by firms in emerging markets Liquidity risk Liquidity, according to Li, Sun, and Wang (2011), refers to the ability of a firm to meet its outside creditors as and when they fall due. Ideally, in terms of liquidity, emerging markets are less liquid as compared to markets found in developed economies. Therefore, as a result of imperfections found in the market place, there are increased brokerage fees and high levels of price uncertainty. When firms in emerging markets try selling stock, they face high levels of risk as compared to their counterparts in developed markets, consequently resulting in reduced benefits because of the low rate of sales (Li, Sun, and Wang, 2011). Additionally, in terms of accessibility of credit facilities, firms in emerging markets have reduced chances as compared to firms operating in developed economies. Political risk Political risk refers to uncertainty that results from political decisions in a given business environment (Li, Sun, and Wang, 2011). Being one of the external factors in a business environment, firms in emerging markets are likely to be affected. In emerging markets, business firms face the likelihood of privatization whereas firms in developed markets enjoy a free government intervention because the kind of system exercised is a free market system (Kraeussl and Logher, 2010). Apart from frequent government intervention, firms operating in emerging markets are also affected by other factors like the inability of governments to control inflation. Similarly, firms operating in emerging markets are endangered because of regular changes in government policies. According to Kraeussl and Logher (2010), in as much as political instability is beyond an organization’s control, its effects are disastrous in terms of business performance. Out of political instability, firms are exposed to higher chances of collapse due to reduced profitability. Therefore, a danger facing firms operating in emerging markets is that of uncertainty in terms of political stability (Li, Sun, and Wang, 2011). Regulatory environment As compared to rules and regulations governing developed markets, those governing emerging markets are comparatively unstable and under developed. Consequently, because of underdevelopment and instability of regulations governing emerging markets, issues to do with transparency, governance and implementation of appropriate accounting standards are likely to be unreliable (Motohashi, 2015). Some countries have imposed restrictions meant to deter free business operations, which in turn affect a firm’s profitability. For example, the use of Facebook was banned in Iraq and Afghanistan. This form of restriction is likely to affect a firm’s profitability, especially if a firm undertakes its operations through such online platforms (Hajin, 2013). Therefore, the chance of survival and consequent profitability of firms operating in emerging markets is limited due to regulations imposed on the business environment. Currency fluctuations Currency fluctuations involve the change of currency normally measured against the US dollar. Currency fluctuations are one of the factors affecting business profitability, and whose control is beyond a business firm (Piljak and Swinkels, 2015). Currency fluctuations are rampant in emerging markets, unlike in developed markets. In terms of business operations, weakening of a country’s currency against the US dollar affects exports since exports will prove to be expensive and consequently revenues and profitability will be hurt in the long run (Estrada, 2005). Therefore, firms operating in emerging markets face risks of reduced profitability due to fluctuations in currency. Cultural barriers Due to the rapid population growth evidenced in emerging markets, there is also increased diversity in terms of culture and social beliefs (Estrada, 2005). Due to cultural diversity, undertaking business in such environments proves to be challenging. High levels of difference in terms of culture are evidenced in emerging markets as compared to developed markets. Similarly, firms operating in emerging markets are experiencing fluctuations and differences in negotiations. Additionally, apart from variations in negotiation power, firms operating in emerging markets face the challenge of adopting and implementing different decision making styles (Piljak and Swinkels, 2015). Problems arising out of cultural variations affect a firm’s performance in terms of reduced profitability. Opportunities of firms from developed markets Emerging markets being markets which have just attained industrialization, offer potential opportunities to firms operating in those markets, besides offering greener pastures for firms intending to invest (Piljak and Swinkels, 2015). However, apart from numerous opportunities available for exploitation in emerging markets, there are also challenges to be encountered. Firms in developed markets enjoy outstanding stabilities, ranging from political, social, and economical to technological. These factors makes operation in developed markets more appealing though obtaining entry in such markets is challenging. In as much as there are much varied opportunities for exploitation in emerging markets, there are also challenges and amidst the challenges, firms have greater potential of exploiting the much available opportunities. Meanwhile, firms in developed markets enjoy more benefits than their counterparts in emerging markets and in the next decade, emerging markets will be enjoying the benefits enjoyed by developed markets only and only if the environment can be predicted. Conclusion Emerging markets offer quite a number of opportunities for potential firms intending to invest there. However, though it proves to be beneficial investing in emerging markets, challenges are looming too. Firms in emerging markets have a duty to mitigate these effects though most of these challenges are often from the external environment and they have no control over them at all. Firms in developed markets enjoy stability not found in emerging markets, giving them an upper hand in terms of competitive advantage and economies of scale. However, developed markets have limitation in resources, especially natural resources because most of them have already been exploited. Additionally, availability of cheap and skilled labour in developed markets is also limited in supply. Though it is relatively expensive to invest in developed markets, emerging markets too offer appealing opportunities amidst looming challenges. In conclusion therefore, firms in emerging markets have a variety of opportunities to exploit compared to their counterparts in developed economies, though with the dynamism in business environment, a clear prediction of continued trend in the next decade cannot be made. Bibliography Alshawaf, A 2008  Emerging markets and e-commerce in developing economies. Edited by Aboul-Ella Hassanien, Kamel Rouibah, and Omar Khalil. United States: Information Science Reference. Cavusgil, T.S., Ghauri, P.N and Akcal, A.A 2012 Doing business in emerging markets. 2nd edn. London, SAGE Publications. Char, S.V 2010, ‘Emerging markets - need for a Taxonomy’, Journal of Emerging Knowledge on Emerging Markets, 1(1), pp. 1-12. 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