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In the recent past, a significant cluster of developing economies began to emerge as a result of robust economic growth results. These emerging markets have been buoyed by improvements in the financial, economic, and institutional reforms modeled into a more business oriented environment (Li, n.d). Emerging markets also referred to as EMs, represent the single most significant global economic growth opportunity and this can be seen through the way that multinational companies have realigned their growth strategies to tap into the growth opportunities presented by the EMs. For instance, Coca Cola has made predictions that China, Indonesia, and India altogether will account for nearly 40% of total world population (Arnold & Quelch, 1998). The investments that the multinational has made in these countries total to 2 billion USD, and sales are expected to double in three year intervals for the unforeseeable future. This is in line with the company’s growth trend in the US market which has been realizing a growth rate of between 4 and 5 percent in the last ten years (Arnold & Quelch, 1998).
Emerging markets: what are they?
Some countries are realigning their economies to lean towards becoming more liberal with regard to free market economies. This has led such countries to offer myriads of opportunities in trade sectors, technology transfers and in foreign direct investment. The World Bank classifies China, Indonesia, Russia, India, and Brazil as the most diverse and robust emerging markets in the global arena today (Li, n.d). Other countries also referred to as emerging markets are South American economies of Mexico and Argentina, South Africa, Poland, South Korea, and Turkey. All these countries have made a significant leap from being regarded as a developing economy to the emerging market status. As such, each one of these countries is a significant market and more so together, these countries will critically determine the direction of world economics as well as the political climate (McCann & McCarren, 2012).
Characteristic of emerging markets
Four principle characteristics define economies regarded to as emerging markets. One major characteristic of emerging economies is the presence of a large regional and national population, extensive resource base and are significant economic powerhouses in the regions in which they operate and more so have a large national and regional market. As such, they are regarded to as driving forces in the neighboring countries as these countries benefit a lot from the successes registered in regional markets (Li, n.d). It is important to point out that their failure also tends to be imported into the neighboring countries.
The second characteristic common in emerging markets is that they are countries going through a comprehensive transitional phase. The domestic reform agendas in emerging markets are geared towards economic growth and political stability (Li, n.d). As such, they have what is referred to as an open door policy dedicated towards ensuring long-established state centered economic policies that were not fruitful in realizing sustained economic growth are replaced with more free market oriented policies.
The third characteristic is that these economies have consistently registered some of the best economic growth rates globally. These countries have economies which have in the recent past contributed significantly to the total growth in global trade. According to the available literature material, by the year 2020, five of the most robust emerging markets will double their share in total world productivity to more than 16% up from 7.8% registered by these countries in 1992 (Li, n.d). Increased economic growth and development suggests that emerging countries will become stronger buyers of products and services in comparison to the industrialized countries.
The fourth characteristic defining emerging markets is that their participation in the global arena has been accepted by the first world countries as being vital in various key economic, political, and social forums (Khanna & Palepu, 2010). These countries are also proactively seeking to contribute more in the global political scene and more so, championing for a larger slice of the world’s total economic pie.
How emerging markets rise into existence
Emerging markets can be said to have risen as a result of the malfunctions evident from state controlled economic development policies and more so the pressing requirements for capital investments (Heinz & Tomenendal, 2012). Many of the emerging markets were once based on the communist or socialist economic systems, which worked well in the short term but failed miserably in achieving sustained economic growth. Governments in these countries came to accept that such an economic model was not feasible in the long term and thus adopted reform agendas to remedy the persistent problem (Li, n.d). These problems were not only economic, but also bore adverse political and social outcomes, which pushed for governments to look for novel ways to improve the political, economic, and social environment. Open door policies were adopted which ensured that the economy became less government controlled and embraced more features consistent with free market economies.
Another issue that brought about the rise of emerging economies was that at one time in dire need of capital injection for multiple project financing. Previous government borrowing mechanisms could not sustain economic development and growth agendas (McCann & McCarren, 2012). These mechanisms included borrowing from international financial institutions such as commercial banks, the International Monetary Fund as well as the World Bank (Khanna & Palepu, 2010). In many instances, this resulted in negative economic growth and development as these economies had to grapple with huge debt burdens which translated to serious economic imbalances.
Looking to the past results exhibited by these economies, governments proved that their adopted centrally controlled economic policies showed that these were very poor in effectively managing borrowed capital to enhance economic growth prospects (Khanna & Palepu, 2010). Emerging markets owe their success to the initiatives they took to look towards equity finance within their very own borders (Li, n.d). The poor results from the previous capital borrowing mechanisms encouraged these developing economies to look to equity investments as the most sustainable option for driving economic growth (McCann & McCarren, 2012). This move ideally ensured that private investors had to be incorporated into the developing countries’ development agendas, thus making them their preferred development partners. This implied that the economies had to institute market economy preconditions so as to promote a business oriented environment that encouraged investments from foreign investors through the much needed foreign direct investments (McCann & McCarren, 2012). This was critical to the rise of emerging markets.
The prominence of emerging market has essentially played a significant role in reshaping the previously established perception on development. One of the ways this has changed is through the preference for foreign investment rather than foreign assistance (Heinz & Tomenendal, 2012). This changed the way investment is viewed by the developed world with regard to emerging markets, such that they are no longer viewed in the same manner as poorer countries, which plea for economic assistance as opposed to investment.
Secondly, the economic and political maturity realized in these countries has resulted in a more rationalized approach to capital investment and trade oriented relations with the developed countries in Europe, Asia, and the US. Trade negotiations and capital investment have little political considerations are fully driven by the need for benefiting from novel market opportunities (Heinz & Tomenendal, 2012). The growth in trust levels registered among the emerging markets and the developed countries implies that the trend is now pegged on global dependency (Li, n.d). The internet has greatly enhanced the speed with which information is exchanged on a global scale, and has played a pivotal role in incorporating emerging markets in the international market in a rapid pace.
Challenges faced by emerging markets
Emerging markets have dedicated most of their synergies towards establishing robust market economies and more so enhance development at sustainable levels. However, there are a number of significant challenges that stem from the previous traditional economic policies and their political systems. A free market economy dictates that government intervention should be comprehensively done away with (Li, n.d). The challenge lies in redefining government role in economic growth agendas and more so vices such as corruption which bear heavily on economic growth and development. Another significant challenge that emerging markets have to be proactive in relates to structural reforms in the financial, political and legal systems to guarantee economic discipline and stability free from political influence.
Emerging markets are regarded as the most significant wing factor in the attainment of positive future world trade and more so stability of the global financial position. They have also become the newest entrants in the global political arena. Presently, they also present the largest pool of untapped economic growth potential. This is encouraged by the adopted positive attitude towards structural reforms in domestic agendas geared towards enhancing the sustainability of economic growth agendas. It is worth pointing out that, political stability and successful structural reforms in the legal, financial, and political aspects will further promote the attainment of stronger future economic outcomes.
Arnold, D. J. & Quelch, J. A. (1998). New Strategies in Emerging Markets. Magazine: Fall 1998 Research Feature. Retrieved on June 7, 2013 from http://sloanreview.mit.edu/article/new-strategies-in-emerging-markets/
Heinz, D. B. & Tomenendal, M. (2012). The emerging market hype–putting market size and growth in BRIC countries into perspective. Critical perspectives on international business, 8(3), 241-258.
Khanna, T. & Palepu, K. G. (2010). Winning in emerging markets: A road map for strategy and execution. Boston: Harvard Business School Press.
Li, C. (n.d) What Are Emerging Markets?. The University of Iowa Center for International Finance and Development. Retrieved on June 7, 2013 from http://blogs.law.uiowa.edu/ebook/faqs/what-are-emerging-markets
McCann, J. & McCarren, D. (2012). Emerging market strategy development and implementation. Journal for International Business and Entrepreneurship Development, 6(3), 244-259.