The Reason behind the Creation of Emerging Markets - Essay Example

?Compare and Contrast the Degree of Emergence of Two Current Emerging Markets in the Same Region Table of Contents Concept of Emerging Markets 3 Place of International Business Activity in That Emergence 6 GDP of China and India 6 Foreign Direct Investment of China and India 9 Trade of India and China 14 Conclusion 15 References 16 Bibliography 18 Concept of Emerging Markets It can be said without hesitation that the term ‘emerging markets’ has been gaining significant importance. However, a proper definition of ‘emerging markets’ is rare. Emerging markets can be conceived as being different concept for different people. There are certain other criteria that can be taken into consideration for country classification. They are location of country, income level, level of budget deficit, trade deficit, size of external reserves, political status and economic performances (Huang, 2007). Emerging economies can be understood as those rapid growth countries with low-income that utilises economic liberalisation as the major factor of growth. The emerging economies must satisfy two criteria namely rapid economic growth and government policies that favour economic liberalisation and implementation of free-market system (Hoskisson & Et. Al., 2000). The countries that are reforming their economies along the market-oriented lines, offering various opportunities in trade, technology transfers as well as foreign direct investments are known as emerging countries. According to the World Bank, China, India, Indonesia, Brazil and Russia are the five biggest emerging countries. Furthermore, there are other countries such as Mexico, Poland, Turkey, South Korea, South Africa and Argentina. It is worth mentioning that each of the countries are vital as an individual markets and the effort put on by each of the economy collectively may assist in changing the face of the global economics and politics (Li, 2011). It is quite important to comprehend the reason behind the creation of emerging markets. There are two reasons: one being the state-led economic development and the other being the need for capital investment. At the outset, the state-led economic development could not produce sustainable growth in the traditional developing countries that forced these countries to adopt open door policies. Secondly, capital was required by the developing countries in order to finance their development. However, the traditional government borrowing didn’t permit the development process. It has been evident from the past records that the developing countries were not able to manage the borrowed funds well and in an efficient manner in order to support their economic growth. Therefore, as a result they started to rely on equity investments in order to finance their economic growth. They seek to attract the equity investment from the private investors in order to partner with them. However, in order to attract the equity financing, it is quite important to create a favourable climate for the foreign investors. Therefore, this change in the financing sources was another factor that led to rise of the emerging markets (Li, 2011). It can be noted that there has been change in the traditional view of the development with the rise in the emerging markets. The first thing to note is that the foreign investment is replaced by foreign assistance. In the recent times, it can be said that the investment in the emerging market is not associated with the traditional notion of providing developmental assistance to the poorer countries. It has further been noted that the emerging markets are lessening their trade relations with the industrialised nations and are more directed towards new market opportunities. With the surmounting two-way capital flows and trade among the emerging markets as well as industrialised countries, it generally demonstrates the change from dependency to global interdependency. In addition, it has further been noted that with the emergence of the internet, the accelerated information exchange is integrating the emerging markets into global markets at a speedy rate (Li, 2011). The most important consideration is that the emerging markets face several challenges arising from the basic problems that have been associated with their economic and political system. This tends to happen when an attempt is made to create a market economy and to ensure the sustainable development. It can be noted that the market economy needs those countries to redefine the function of the government in the process of development and the reduction of the government’s unnecessary intervention. The other biggest challenge for those countries is to control corruption that comes on the way of successful process of development and distorts the business environment. An even bigger challenging task is confronted when the countries need to bring structural improvement with their financial system, political system and legal system that would assure a stable economy that is generally free from the political disturbances and interferences (Li, 2011). However, it can be determined that the emerging markets are the main factors that will assist in the future growth of the world trade as well as the global financial stability and will become the critical players in the global politics. There are huge opportunities ahead of them and they need to take domestic changes in order to support the sustainable economic growth. However, it can be depicted that if the emerging countries can maintain the political stability as well as succeed with their structural changes then the futures of these countries seem to be promising (Li, 2011). Place of International Business Activity in That Emergence Two emerging countries that have been chosen for the study are India and China. Both the countries seem to have certain similarities as well as differences as emerging countries. It has been evident that China’s economy has been gaining much attention in the world. It has been noted that GDP growth that has been achieved by two countries that is China and India made several other countries feel envious. When China is compared with India, then it becomes evident that both the countries are among the world’s top ten exporters in the commercial services exports (Mehta & Kumar, 2005). GDP of China and India It is found that in the year 2003, the energy consumption was quite higher which made China the second biggest consumers after United States. In the year 2004, China was successful at becoming the biggest importer of oil in the world. Since it was expected that the country would maintain 7% - 8% of growth rate for decades, therefore the role of China in the world energy market has been significant. It was further expected that the total energy consumption would increase to 2173 MtCE in the year 2010 with an annual growth rate of 3.8% which was a bit slower in comparison to the average rate in the past decades. Furthermore, the reasons behind the slower growth have been declining economic growth and consumption of the energy because of the structural transitions in the Chinese economy (Crompton & Wu, 2004). The data provided above reflects the past performances of the economy of China. However, it is important to have an understanding of the current GDP growth rate that will determine the degree of emergence of both the countries in the same region. It has been noted that in the first quarter of 2011, the Gross Domestic Product has been expanded in China by 9.70 percent. It has further been observed that the average quarterly GDP growth was 9.31 percent since the year 1989 to 2010. Since the last 30 years, there has been radical transition in China’s economy from centrally planned system which focused upon the international business to market-oriented approach where the private sectors are growing rapidly. China’s fast economic growth has been supplemented by export growth (Trading Economics, 2011). In the month of March 2011, the consumer prices were quite higher than expected which was at 5.4 percent. In addition to this, the producers’ prices were high by 7.3 percent in the first quarter of 2011. The retail sales in China increased 17.4 percent in Q1 of 2011 while the industrial production rose to 14.8 percent (Trading Economics, 2011). The figure below depicts China’s gross domestic product growth rate for the period 2007-2011. Source: (Trading Economics, 2011). It is now important to have a thorough analysis of the growth rate of Gross Domestic Product of India. When India’s GDP growth rate is compared to China’s GDP growth rate, it is found that the growth rate of GDP of India is quite slower. In the fourth quarter of the year 2010, it was found that the Gross Domestic Product growth has been recorded to be 8.20 percent. The average quarterly Gross Domestic Product growth of India has been 8.40 % from the year 2004 to 2010. The diverse economy of India consists of conventional village farming, handicrafts, modern agriculture and variety of services as well as variety of modern industries. Service industry can be considered as the main driver of economic growth that results for more than half of the overall India’s output (TradingEconomics, 2011). The various economic activities that demonstrated growth in the third quarter of the year 2010-2011 in comparison to the third quarter of 2009-2010 are considered to be agriculture, forestry & fishing at 8.9 percent, construction 8.0 percent, and financing, real estate, insurance and business services at 11.2 percent and transport, trade, hotels and communication at 9.4% (TradingEconomics, 2011). There has been rise in the rice production by 5.6%, coarse cereals by 28.2% and pulses by 52.8% during the 2010-11. Similarly, there has been rise in other divisions of the economy as well such as service sectors and mining sectors (TradingEconomics, 2011). The GDP growth rate of India for the period 2007-2011 can be explained with the help of figure given below. Source: (TradingEconomics, 2011). It has been evident that the Americans perceive China to be one of the most influential countries and they expect that there will be rise in the power as well as influence in the near future. Americans are apprehensive regarding the emergence of China as the world power. Most of the economies view China to be an economic competitor. However, Americans perceive China’s growing economic power to have a positive impact upon the overall economy (World Public Opinion, n.d.). Foreign Direct Investment of China and India The foreign direct investment (FDI) of China in the first two months of 2010 had increased nearly 5 percent from the previous year to more than 14 billion US Dollars. It is because of vigorous growth as well as expanding domestic market, which attract other countries for investment. It was further found that in February 2010, China was successful at attracting 5.9 billion US Dollars in FDI, which was 1.1 percent higher in comparison to the same period 2009 (People’s Daily Online, 2010). This can be explained with the help of the graph represented below. Source: (People’s Daily Online, 2010). According to the survey that has been conducted by the transnational corporations, it was found that most of the companies view China as first and India as second most central places for FDI over the period 2010-2012. According to 2010-2012, the World Prospectus Survey that has been released recently by UNCTAD demonstrates that China has been able to retain the title of being the world best FDI destinations. In the meantime, India was successful in overtaking the US in order to claim the surveys second spot as the US economy continues to struggle. This can be explained with the help of the figure demonstrated below which shows the top priority host economies for FDI for the period 2010 to 2012. Noteworthy, the number that has been mentioned in the parenthesis in the chart below denotes the rank of the country in the survey of UNCTAD 2010 (Asia Briefing Ltd, 2009). Source: (Asia Briefing Ltd, 2009). The other figure that has been demonstrated below shows the prospects of foreign direct investment for the expenses of respondent companies for the period 2010 to 2012 in comparison to 2009 by the home region. It is to be noted that the average of the responses have been gathered from the transnational corporations that has been surveyed. In the figure below 0 means no change, 1 implies an increase of less than 10 percent, 2 means an increase between 10 percent to 30 percent, 3 gives the indication of an increase between 30 percent and 50 percent, while 4 suggests a rise of higher than 50 percent (Asia Briefing Ltd, 2009). Source: (Asia Briefing Ltd, 2009). It has further been noted that the FDI in China expanded to a record $105.7 billion in the year 2010 which proves that the surmounting incomes will assist in boosting the demand in the world’s fastest-growing key economies. It has been examined that China will focus upon its major tasks such as increase in the wage rates and reduction of the income inequality in the next five years. In the month of October 2010, it has been supposed by China’s leaders that Samsung Electronics Co. as well as LG Display Co. producing LCDs have received approval from the Chinese government for setting up of the factory to make LCD in China in order to meet the rise in demand (Bloomberg, 2011). It can be noted that the global foreign direct investment flows in India has plunged by over 31 percent in the year 2010 despite the vigorous economic growth as stated by United Nations Conference on Trade and Development (UNCTAD). It has also been noted that China as well as other countries have observed heavy FDI flows which have been reported by UNCTAD in its Global Investment Trends Monitor. The FDI inflows in India have been USD 23.7 billion in the year 2010 in comparison to USD 34.6 billion in the year 2009. According to the opinion of UNCTAD’s experts, there has been huge fall in the FDI and the reason behind this is not known (The Times of India, 2011). Various reasons that might slow down the rate of foreign direct investment around the globe in the year 2011 has been the risk factors such as increasing sovereign debt, constant fluctuation in the currency markets, investment protectionism and slow world economic recovery (The Times Of India, 2011). A discussion between China and India can be effective in order to understand the degree of emergence on the basic statistics such as education, life expectancy and health. Several statistics have been drawn from the World Bank and United Nations about China and India. It can be observed that the life expectancy rate at birth in China is expected to be 73.5 years whereas that of India has been expected to be 64.4 years. In India, the infant mortality rate is expected to be fifty per thousand while in China it is expected to be just seventeen. The death rate for children aged less than five in India is sixty-six per thousand while it is nineteen in China. The average age of sending children to school has been 4.4 years in India while in China it has been 7.5 years. It has been noted that in China the adult literacy rate is expected to be 94 percent while that of India has been 74 percent in relation to the preliminary tables of 2011 census. Though this figures may not have much direct relation or effect of economic growth, they however show that there are certain areas where India may already be ahead of China making it evident that in some of the aspects the degree of emergence of India is high in comparison to China (China Digital Times, 2011). The comparison between the two countries can be comprehended with the diagram provided below. Source: (Jason, 2011). Trade of India and China It has been noted that the performance of India in the year end 2009/2010 has exceeded the expectations. The sectors such as farm that was expected to contract showed flexibility increasing by 0.2 percent. It was further noted that the non-farm sector also performed well. According to the assessment of the Council, it has been exclaimed that the growth in the Indian economy would be at 8.5 percent in the year 2010/ 2011 while it is expected to be 9.0 percent in the year 2011/2012. It is further known that in 2011, agriculture will grow at 4.5 percent; services will grow at 8.9 percent; and industry will grow at 9.7 percent. It has been noted by DGCI&S that merchandise trade export was 176.6 billion in the period 2009/2010 that was less by 4.7 percent than 2008/2009. It was because of the fluctuations in the currency, the rupee value of exports demonstrated no decline in 2009/2010. The other important consideration has been that the value of the merchandise imports had been 8.2 percent in 2009/2010 in Dollar terms which was lower at $278.7 billion and 4 percent less in terms of rupee (Indian Stock Market Guide, 2010). It can be revealed that in order to attain 9.0 percent growth in the year 2011/2012, it is important for the public policy to stimulate business confidence and thus facilitate increased investment (Indian Stock Market Guide, 2010). On the contrary, it has been noted that the performance of exports and imports in China exceeded the expectations in the year 2010. It has been stated that because of the base rate increase and the fall in the world economic growth, the export growth rate in the year 2011 will be down. However, in the year 2011, it can be expected that there will be growth in China’s export to 19.5% (China Trade Information, 2011). Conclusion It can be stated that both the two countries namely India and China have made huge progresses in the economic development in the recent times. It is because of rapid economic development in both the countries that there have been improvements in the living standard as well as in the quality of life of the people of each country. The economic development has also assisted in lifting millions of lives from poverty. Therefore, it can be revealed that both the countries are performing well. From the overall analysis, it can be concluded that the degree of emergence of both the countries had been substantial in the past few years and will continue to be high in the coming years provided the global economic situation is favourable (Jason, 2011). References Asia Briefing Ltd, 2009. China and India are World’s Top Two FDI Destinations: UN Survey. News. [Online] Available at: http://www.2point6billion.com/news/2010/09/07/china-and-india-are-worlds-top-two-fdi-destinations-un-survey-7026.html [Accessed May 4, 2011]. Bloomberg, 2011. News. Foreign Direct Investment in China in 2010 Rises to Record $105.7 Billion. [Online] Available at: http://www.bloomberg.com/news/2011-01-18/foreign-direct-investment-in-china-in-2010-rises-to-record-105-7-billion.html [Accessed May 4, 2011]. China Digital Times, 2011. China News Tagged With: India Comparison (16). 2011. [Online] Available at: http://chinadigitaltimes.net/china/india-comparison/ [Accessed May 4, 2011]. 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