Possible Opportunities and Challenges for Firms in Emerging Markets - Coursework Example

In the next decade do firms from emerging markets have greater opportunities or greater challenges when compared with firms from developed markets? Student’s Name: Course Code: Tutor’s Name: Date of Submission Introduction An emerging market is an economy with some features of a developed market but has not reached the standards of fully developed economy. These are countries with trends of becoming developed in the future (Luo & Tung 2007). They include countries which are having the BRIC acronym meaning Brazil, Russia, India and china. South Africa also falls under this category of economies. These countries have been having characteristics associated with the opportunities they have for new firms to venture into as well as sustaining the ones that are there. The opportunities include having positive demographic trends, some positive economic factors, and good ownership models. They also offer a variety of diversified markets as well as showing a positive technological advancement in their production methods. In spite of the opportunities, the markets are also faced by challenges here and there that usually scare away investors (Manktlow 2014). Challenges such as inflation, political instability, cultural differences and adoption of democracy usually challenge investors in the regions as they are capable of interfering with the outcome of firms. It is therefore advisable for a firm to put into consideration both the opportunities and the challenges before making an investment decision on emerging markets. This essay will try to analyze the possible opportunities and challenges for firms in emerging markets and compare them with those in developed economies. Opportunities available for firms in emerging markets Positive demographic trends Demographic trends are changes or rather developments in a population. This may include changes in the age, geographical locations, acquirement of education income of the households, health of the people as well as their religion. When these changes are positive in relation to investment opportunities in emerging markets, they attract more investors and market for the products produced hence creating an opportunity for firms in these markets (Mathews 2006) . Most emerging markets such as China and Brazil have a growth in population that is increasing the number the number of people in the work force in these economies. This is contrary to the developed markets where the population is aging at a relatively higher rate (Manirov and Manirova 2012). In emerging markets, the domestic consumer’s base is being increased by the migration of the working population from their rural areas in to the cash economy. They provide market for their locally manufactured products and become less reliant on what they get from other countries. The provision of this demand is very significant as it acts as an engine for growth of firm in emerging markets. According to estimates of the United Nations in March 2010, 1.7 billion people in emerging economies have an income between US $5,000 to US$2000 per year. In consumption the emerging markets have been estimated to outdo their counterparts in the developed markets (McFarlin and Sweeney 2014). Economic factors Government’s debt all over the world increased dramatically following the credit crisis of 2008, but the developed markets were more affected than their counterparts in the developing markets. This is because they had to maintain their levels of competitiveness with one another as well as continue with their normal production activities (Char 2010). A good example is the Japan’s 220% debt/GDP ratio compared to China’s 69%. While there have been forecasts to diminish budget deficits globally in the next five years, developed markets are likely to continue taking more debts than the emerging economies. According to Chaise and Gugler (2009), developing markets will therefore be at an advantage as the banking sector in the developed markets has been negatively impacted by the subprime debt market collapse. Due to this, banks in the emerging markets have been free of financial liability by lending restrictions that have been there in the developed markets giving investors an advantage to invest in or develop firms in emerging markets. In addition firms in emerging markets enjoying the advantage of high saving rates and low household debt levels, their penetration of financial products have been at nascent levels meaning there is room for more development and access of capital in emerging markets (Char 2010). Technological advancement As far as technology is concerned, emerging markets have a room for improvement compared to the developed markets. In business, any room for improvement becomes a business idea that can be exploited or ventured into. Investors in the emerging markets who can come up with new methods of production using the new technology in emerging markets will be sure of maximizing their profits more than using the same technology in developed markets where they are used (Cuervo-Cazurra, 2007). Technology can be used in areas such as marketing where communication related to their products will reach many people in the world through the internet, attract buyers and maximize profits. The production volume can be increased by use of modern technology and this will save time and resources with more profits in the long run (Dobbs and Ramswamy 2015). In Brazil for example, there is evidence of technological boom happening in Sao Paulo. Ownership models Growth and internationalization of firms from the emerging markets have been greatly supported by their ownership models (Cuervo-Cazurra 2007). Major companies in the developed world are owned by the public. Their broad structure and stock exchange listing enforce on short term profitability and cost control. In contrast emerging markets major firms are owned by the state or family. This means that their operational methods and philosophies are different. According to Dobbs (2015), many of them look at the long run; they focus on top-line growth and further investments rather than short term profitability. To be more competitive, growth is more important than maximizing profits from the capital invested. This is the reason why Chinese firms are growing four to five times as fast as firms in developed markets over the past decade and if the scenario continues, we expect them to be leading in the next decade (Chung 2006). These firms in the emerging markets are also merging to offer better services and compete favorably in order to achieve growth from their ownership culture. Diversifying markets Diversification is the process of reducing volatility through investing in a variety of activities, allocating capital in a way that there is reduces risks when investing (Char 2010). Investors have tried to seek opportunities where they can grow through diversifying their markets deeper in emerging markets. With the aim of earning more profits and margins, they have learnt that emerging markets have become more profitable due to diversification and they are establishing themselves well. Firms in emerging markets, unlike developed ones, feel that they need new ideas about products, services and business methods thus making them establish themselves globally (Manirov 2012). Availability of Raw Materials Nearness to raw materials for their industries is also making emerging markets to establish branches further within the emerging market so that they can source from their suppliers due to the high amount of unexploited resources in emerging market regions (Luo 2007). Challenges in Emerging markets Inflation There have been consistent inflationary pressures in developing markets. This has made central banks in these countries to keep on putting tight monetary policies to firms in the region (Harvey 2000). These include increasing interest rates on borrowed loans so as to discourage them from borrowing. On the contrary, the low inflation in developed economies maintains a highly accommodative environment to sustain and develop their economic advancement. Questions have been raised on the viability of a business enterprise thriving in an area where the currency is losing value consistently. Liew and Vassalou (2000) argue that this scares away potential investors who view the pressures brought about by the inflation levels as a setback to their business enterprises. Due to this growth of firms in these regions such as Russia and India, this has outdone the high expectations of investors whereas there is gradual picking up in the developed economies which are outperforming the low expectations of investors (Virgile and Molz 2014). Political instability As noted earlier, most emerging economies have young and growing population. This can cause major instability in the political dimension during seasons of slow down (Lin and Wang 2003). These are seasons when emerging markets experiences wage stagnation and unemployment. During these times angry youth take to the streets and this can stop business operations and minimize profits of firms in these economies unlike their counterparts in the developed economies. A good example is the labor unrests being experienced in South Africa mining sector today due to the falling commodities prices. In the first quarter of 2014, strikes led to 25% decline in activity causing the South Africa’s economy to contract significantly (Dobbs and Ramswamy 2015). During economic down turns, ethnic tensions may arise making businesses to lose significantly due to the unrests. As people in emerging markets try to look for solutions to their problems they tend to point fingers to foreign investors and the environment becomes unfavourable for investment. Adoption of new democracies During economic crises, transition of authority and leadership in emerging markets in not likely to be smooth as it can be in developed economies. The principles of democracy which have been approved during the boom period are put in test when leaders need to hold on to authority. The use of media adds twists to this dynamic (Cuervo-Cazurra 2007). Countries such as Russia and China for instance, protests have in one way or the other disorganized regional programmes with anger vented at leaders or politicians. The media have been used to mobilize and coordinate protests across the nation as it once happened in the Middle East. Political unrests usually bring negative feedback on the economic situation of an economy and this has been a reason why many investors are scared away in investing in emerging markets. It is a possible scenario to have a small slowdown which brings and quickly escalate into a big economic problem (Chung, Johnson, and Schill 2006). Cultural values Culture is a people’s way of life. It is the collective programming of people’s way of life that distinguishes them from those of another people. Cultural values shape somebody’s behaviour. For any business enterprise to succeed, it has to bear in mind the cultural background and differences of the people in its environment (Char 2010). Emerging markets are characterized by individuals with different cultural backgrounds which may challenge an investor who is new to them. People social beliefs as well corporate governance methods may discourage the types of investment s to be made in a particular region therefore scaring away investors. A good example is the South Africa’s belief that foreign companies, in their mining industry oppress them making them to protest (Dobbs and Ramswamy 2015). Conclusion Emerging markets avail a number of opportunities for potential firms and investors with an intention of investing in the regions. However, even if it seems to be beneficial investing in emerging markets, challenges are still there too. Firms in emerging markets have a duty to manage the effects of most of these challenges which are oftenly related to the external environment of business enterprises, to have control over them for the success of their firms. Firms in developed markets seem to 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 human labour due to their ageing population. 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 but wise decisions have to be made before investing in order for a firm to maximize its profits as well as being beneficial to the society due to these factors a clear prediction cannot be made on the trend in next decade to unpredicted changes. 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