FDI in the Emerging Markets - Opportunities and Threats - Essay Example

1. Introduction

According to John Fitzgerald Kennedy, the countries are neighbours by geography, partners by economics and allies by the necessity. The investment as a phenomenon is the vital attribute for the socio-economic developments, whether it is characterized as private of public (Phillips and Phillips, 2011). The recent economic recession of 2008 has undoubtedly changed the global investment field image, and the present-day circumstances put the developing countries at the forefront in investment attraction.

Within the competitive global arena, foreign direct investment (FDI) plays a crucial role in the business internationalization. The concept has been extended to more multifaceted form, as FDI is deemed as a powerful channel in a circulation of the technologies, skills and knowledge across the borders (Adejugbe, n.d.). On the initial level, the foreign direct investment is the sufficient supplier of excess financial resources base, employment, and the effective means of transferring managerial practices, governance and expertise (Poillon, 2000). The range of developing economies in the structure of BRICs, MINTs and SSA represent the increased interest from the investors standpoint due to the high potential of bilateral benefit for the both partners in multinational collaboration.

However, the foreign direct investment has the ambiguous character, as the free access to the market presumes exploitation of cheap workforce and natural resources, which puts the benefit under question (Das, 1993). Therefore, the range of opportunities and challenges underlying the FDI in developing economies are to undergo in-depth analysis. The purpose of this study is to provide the assessment of the FDI from the both perspectives within the emerging market environment.

2. Attractiveness Of The Emerging Markets For Foreign Investors

The acronym BRICS was created by Jim O’Neil to comprise the group of Brazil, Russia, India, China, and later added by South Africa. In recent years, the BRICS have been the object for the high aspirations all over the globe, as the illustration of the economic momentum. Nevertheless, MINTs group represented by Mexico, Indonesia, Nigeria and Turkey is swiftly acquiring more investment attention and is regarded as the next big thing. The four participants do not yield to the BRICS in terms of growth rates, population numbers, the rise of entrepreneurship and rapid middle-class advent (Fingar, 2015). On such a promising background, the Sub-Saharan group has experienced an uneasy period during the past 2015 year. The group is made up of 48 countries except the Northern Africa and the Middle East and represents a huge territory with the population about 800 million people. Despite the considerably high region potential, the difficulties in the face of oil price depreciation, currency fluctuations and poor demand from the major trade associates have had the dramatic imprint on the economy of the SSA area.

The grouping necessity of the above-mentioned countries is based on the metaphoric synonym for the new development and expansion, however, the perception of BRICS, Mints or SSA within the global arena as the separate blocks are severely criticised by theorists (Carcillo, 2012). The main claim was discussed in the Financial Times 2013 issue, where the emphasis was made on disparity and unique economic prerequisites of each participating country (Singh, 2010). Regardless of the relative similarity in terms of financial and demographic expectations, the groups of developing markets might not face the growth or stability rates in contrast to 1990s and 2000s rates.

Therefore, the term ‘emerging market’ is to be referred to as the reflection of a certain area, where the technological and demographic dimensions along with the required tangible and intangible assets are defining aspects for the entire region development on the global arena (Neuhaus, 2006). Taking into consideration the generality factor and the commonalities within the countries combinations, the foreign direct investment sees a number of opportunities provided by the emerging markets.

3. Opportunities For FDI

The geographic view angle plays a crucial role for particular countries. For instance, geographical position adds bonus points to Mexico due to proximity to the United States and Canadian markets as well as the neighbouring South America and Central economies (Fingar, 2015). The similar advantage can be exemplified by Indonesia, being favourably located in the South–Eastern part of Asia. In contrast, Sub-Saharan area and Nigeria, in particular, cannot boast of beneficial geographic credentials, however, the country is notable for its high potential for economic growth. Therefore, Nigeria has a chance to generate its individual commercial crossroads.

The favourable geographical position of Turkey also plays a crucial role in establishing international cooperation, as the country is the main portal connecting the Middle East and the European continent. Furthermore, Turkey is perceived as the energy gateway, building bonds with Middle East, Russia and Central Asia.

Following the geographical dimension, the political exposedness to the foreign direct investment is the defining factor which may create the advantageous environment. During the last fifteen years, the political sphere has undergone significant alterations represented by Turkey, Colombia, Mexico and Indonesia. Predominantly, the movements have been made towards the friendly environment for the business and the addressing the issue of tax incentives. The privatization activities in the context oil companies are also regarded as the step forward to the promising atmosphere for FDI (the case of Mexican Pemex).

Despite the religious and secular uncertainty faced by Turkey, in an economic sense, the government has resorted to considerable adjustments during the last decade in a direction to openness. The approaches towards democratic society have been made by the Indonesian government, and the country’s autocratic political system has been changed to humanistic and democratized paradigm (Younas, 2016). The Sub-Saharan area in the face of Nigeria with its multimillion population has traced the transformation to new capitalistic and robust economy, however, bribery and corruption are still the issues to be tackled.

Nevertheless, even when the points of contact between the host needs and foreign offerings have been found, the stability cannot be guaranteed. The external environment bears the certain degree of unpredictability, implied by elections or other political uncertainties, economic recessions, the fluctuations in societal perceptions which can have damaging effects not only on emerging but on the developed economies as well.

4. Challenges for the FDI

Taking into account the disparity within the mentioned groups of countries, the major challenges related to the FDI in emerging markets were historically connected with the underdeveloped or unstable political environment. The major issue that presented the serious threat to the foreign-owned assets in the majority of developing economies was known as ‘expropriation risk’, which has become a considerably rare occurrence. The asset seizures appeared to be an inappropriate measure for value retrieval from the foreign entities, thus, the tactics was changed to the stronger legislative control.

The foreign direct investment is not immune to the policy threat, which is the common weak point of the emerging markets. The government’s inability to enforce the regulations and norms is as problematic as the permanent alterations investment documentation alterations to the discriminatory manner.

The problem of terrorism is gaining momentum on a global scale, which is overwhelming for the developing and developed markets equally. However, in a context of emerging markets, the terrorism presents the serious challenge for the FDI. Provided the country has the advantageous geographical position, cheap and professional workforce, and at the same time the high possibility of terrorist attack, the MNC is subject to go all-in. Generally speaking, the country characterized by the terrorism high incidence does not present the attractiveness for the prospective investor.

Taking into consideration the experience of Colombia, it is important to note, that the 1980s and 1990s were the decades of flourishing terrorism, violence in the face of the huge drug business, and the overall severe criminality. However, according to the statistical data, the gradual decline of the terrorism rates was followed by the respective increase of the foreign direct investment inflow into the country. Regardless of the enhanced situation, human rights dimension in Columbia raises great concern due to divarication of the written declaration and the practice. Furthermore, apart from the promising economic perspective and enhanced political environment, Colombia’s infrastructure still remains to be considerably poor in the contrast with the other developing economic. The infrastructure is the critical aspect for the MNC willing to undertake investment activities, and the insufficient supply system may become a damaging factor for the business.

The problem of corruption and bribery can cause serious losses for the foreign direct investment. The case of China and GSK corporation perfectly exemplifies the degree of the challenge, which is presented by the corrupt schemes within the country. The Chinese government representatives predominantly come from the huge business where bribery is perceived as a normal marketing practice. Foreign direct investment into the corrupt environment does not represent the perspective of success in any case, as taking bribery into practice or not, the MNC will suffer great losses. Thus, the country with high corruption rates is not a solid surface for the FDI, as the consequences might be irreversible.

In recent decades, India has been one of the most attractive countries for the FDI due its scale and potential. However, the number of existing challenges are serious obstacles for the investors which are to tackle on the government level (Estrin and Meyer, 2004). Provided the retail industry is the major investment area, the unorganized market participants are the stumbling blocks for the market share gaining (Buffie, 2001). Moreover, the unstable and underdeveloped FDI schedule, accompanied by uncertain economic Indian environment is the source of the net capital flow issues.

The Sub-Saharan region, Nigeria, in particular, requires serious investment inflows, however, the area has been receiving the least amount of FDI in comparison with the rest of the group. Nigeria equally to other African states is suffering from the poor governance: the inadequate monetary policies, restrictive tax system, high inflation rates, and huge budget deficits as a logical result combine the unwelcoming environment for the foreign direct investment. Additionally, bureaucracy is present the legal bottleneck for the investors, which are subject to be burdened with numerous difficulties implied by permits, quotas, and commissions.

The other reason for the investors not to regard Nigeria with all its attractiveness is the abundance of intellectual property encroachment. The violation in this sphere remains to be uncontrolled for decades with the government closing its eyes to the problem. The products poor imitations are allowed for the free trade in the marketplaces and stores all over the country (Fingar, 2015). The procedure of the trademark registration lacks constituency and mere logics. The process of registration documents acquiring in Nigeria can be prolonged to several years. However, losing the documentation overnight is a common practice, and this challenge is rooted in the low professional level, which in its turn originates from insufficient education.

As the example of the most unwelcoming environment in terms of foreign direct investment, it would be essential to take Russia, as the investment climate is a mere barrier (Ilyina, 2005). Taking into account the financial and fiscal policies, the investors would face serious taxes difficulties (Rostowska, 2013), and Russia is deemed one of the world’s worst taxpayers (Carcillo, 2012). Import tariffs, highly corrupt political vertical, inadequate accountability and serious criminality gaining momentum similarly to 1990s period push foreign investors backwards.

5. Conclusion

The foreign direct investment in the context of the emerging markets is provided with numerous opportunities of the bilateral character. The developing markets have a chance to enhance the economic environment, increase the development of the technological practices, knowledge and skills inflows. The foreign direct investment as an attribute of the internationalization is the effective instrument to drive the financial profit of the multinational companies and at the same time have the positive impact on the host country. However, the foreign direct investment is a rather demanding undertaking, and the environment attractive for the investment is complex and multifaceted. And in this respect, the developing markets are challenged with the common issues. The political sphere is perceived as the preliminary source of the barriers for FDI, thus, the deep systematic alterations can positively influence the overall environment for potential investors.