Globalization and Emerging Markets

Abstract

The acceleration of globalization in the postwar twentieth century and the appearance of domestic firms from developing countries in international markets are crucial historic events. Globalization has affected relations between developing and advanced nations, their societies, and their governments in important ways. The world has changed, and emerging markets have moved from the periphery to the center, playing crucial roles in international politics and trade. As emerging markets evolve, experts seek new ways to determine the key factors of their success or lack of success, and the very term "emerging markets" demands new specificities in order to adapt to an ever-changing world order.

Overview

The concept of emerging markets became important when international investors began to seek profit opportunities in developing countries, usually when their levels of gross domestic products (GDP), as well as standards of transparency and performance, had developed enough to induce confidence among potential investors. Developing countries such as Brazil, China, India, Russia, and South Africa, also known collectively as the BRICS nations, became leaders in the modern global economy by the early twenty-first century. The BRICS nations are among the largest emerging markets in the world; the category also includes Mexico, South Korea, Turkey, Saudi Arabia, Iran, and Indonesia, among others.

An emerging market is commonly understood as a country that shares some of the characteristics of developed countries, but has not yet implemented all the standards and practices that characterize developed nations. Emerging markets are determined by specific characteristics that rule out many of the poorest countries. Countries excluded from an emerging market denomination are usually those with rulers unwilling to adopt particular economic, social, or political reforms; those in which the dominant groups are not interested in attracting a broad range of local and foreign private investment; or those that are simply too poor. From an economic standpoint, emerging market economies are those that have a low to middle per capita income. These countries represent a significant percentage of the global economy.

The term emerging markets is often conflated with that of emerging multinationals, because they provide the fertile ground from which these companies arise to compete in the international market. However, these are two separate phenomena. An emergent Chinese or Mexican firm, for example, usually aims to become an international firm. In an increasingly common scenario, foreign investors may own up to 50 percent of emerging market firms, which does not mean they own half of the emerging market. Many firms, however, are still identified with their national origins.

There is no consensus as to a specific definition or theory of globalization. There are, however, two basic understandings of globalization. One links globalization to the development of capitalism and empire, and conveys the dominance of powerful nations over poorer ones. This model is based on the enrichment of powerful countries at the expense of those less developed. Opponents of this model claim that it creates inequality and impedes true democracy.

Another model views globalization as increased market competition, trade networks, and access to opportunities for many. Its supporters argue that globalization offers more economic opportunities by way of investment, which in turn promotes growth and sustainable social development for countries that need it the most. Others posit that although market freedom by itself may not strengthen democracy, in a globalized society it is possible to support civil society and social investment by governments and business.

In general, globalization is characterized by the flow of goods and services, of labor migration, and of new capital and technology. These have a significant effect on emerging markets and also impact global consumption behaviors, development of new technology, communication networks, and production systems. Globalization is related to accelerated market flows, digital financial transactions, trade and economy, increased competition, constant innovation, privatization, and tariff liberalization. Politically, globalization has been linked to a weakening of national sovereignty.

Globalization is also the economic phenomenon that allows emerging markets to grow. Some of the leading contemporary global companies were born in developing countries. Among these are the Brazilian private aeronautical conglomerate Embraer, the Mexican building materials producers and suppliers Cemex, and India's Infosys Technologies, a leading information and software multinational. These companies have surpassed larger transnational firms and represent the emerging economies of the countries in which they formed.

Further Insights

The Evolution of Emerging Markets. The economic and entrepreneurial drive occurring in developing countries is tied to their economic growth. According to World Bank data, in the 1980s, the volume of external commerce from developing nations contributed to 33 percent of its GDP; by the mid-1990s, it had grown to 43 percent. Moreover, the movement of private capital towards developing countries quadrupled in the first years of the twenty-first century. It is important to note, however, that these figures represent solely the most salient emerging economies.

In the nineteenth century, Great Britain and other advanced nations spearheaded the Industrial Revolution. At the time, European nations traded with countries such as China, Persia, and the Ottoman Empire, which had developed their own international trade systems. International trade has existed since the Iron Ages. In the Modern Era, however, industrialization served to accelerate the process of internationalization, or, as it has become known, globalization.

The two major world wars of the twentieth century led to the political competition of the United States with the Soviet Union. This period became known as the Cold War. The postwar years gave way to the rise of a strong economic competitor in Japan. After World War II came the collapse of the colonial system, and small, newly independent countries began to arise around the world. In time, a gradual lifting of tariffs and increase in international trade made consumer goods and services available to other countries. International trade from advanced nations helped disseminate the ideology of conspicuous consumption in smaller countries, impacting their cultures and production systems. Some developing countries took advantage of international trade opportunities, implemented reforms, and bettered their production systems. For example, China and some Latin American countries established economic reforms that differed from traditional planned state economies. At the time, economies were conceptualized along a continuum with free market–based economies at one extreme and the communist economic model at the other. This continuum included a variety of economic models in developing countries, many of which had been colonies of developed countries. In time, a great number of these countries were identified as emerging markets.

Until the 1970s, global financial institutions still concentrated on investing in industrialized nations, such as the United States and Japan. By the 1990s, however, some developing nations had reduced their external debts, established adequate growth policies, and offered economic incentives for industrial development. In 1986, the Soviet Union formalized a series of government, economic, and legislative reforms known as perestroika and glasnost. These changes led, in turn, to a weakening of the welfare state and of government controls and to increased market freedom. The socialist central planning system became unpopular, giving way to an unbridled market economy. Russia soon surfaced as one of the most important emerging economies in the world, particularly based on its energy supply industry.

As occurred in Russia after the collapse of the Soviet system, privatization—the transfer of state assets to the private sector—became one of the key elements of many emerging markets. The speed and extent by which privatization took place in many countries led to some problems, such as destabilization and corruption. Russia and countries in Latin America and Asia suffered economic crises in the 1990s, due in part to high levels either of state or corporate debt. Many established international firms went under. Many governments and firms restructured debt, and most firms that survived the crisis emerged stronger.

The private sector in many developing nations worked towards lifting tariffs and other import barriers, and some firms emerged as leaders in the international market. Thus, countries previously at the periphery of the world economy, moved towards a central role. India and China, for example, emerged as leading economies. China became a leader in the export of low-cost consumer goods, and Hua Wei in China is a leading firm in the information and communications technology (ICT) industry worldwide. European countries are heavily dependent on Russia's vast gas reserves, distributed by the firm Gazprom. As they became successful, emerging markets began to have an impact on the pricing of goods such as oil, heavy metals, and construction supplies, an area previously controlled by industrialized countries.

In short, emerging markets took control of a bigger share of the global market. This development correlated with the expansion of a consumer-oriented middle class in developing countries with greater purchasing power than before.

The expansion of emerging markets has encouraged the growth of international firms all around the world. These countries have become important producers of competitive and high-quality goods. They provide the world with a significant share of the food and goods consumed in advanced nations, as well as the traditional exports of raw materials and energy. Specific characteristics in their national developmental stages often enable emerging markets to be more profitable than their peers in advanced nations. Many produce goods that are better designed and more durable than competing goods from traditional, established multinationals.

Brands from transnational companies in emerging markets enjoy increasing recognition worldwide. The wide variety of companies from emerging markets that have made successful use of branding strategies run the gamut from South Korean automobiles to Chilean wines. As emerging markets continue to grow, they play a broader range of roles in the world market; in turn, multinational firms from emerging economies often move from being competitors to becoming business partners with traditional and long-established multinationals from developed nations. However, different emerging markets are at different stages of development and not all are equally attractive to foreign investment. There are some key factors in identifying a successful emerging market, especially the stability and extent of the country's economic and political institutions. These factors include an established rule of law, transparency of government and private sector transactions, regulatory controls, infrastructure, and an apparatus that allows the enforcing of contracts, copyright, and patents.

Initially, investment in emerging markets occurred in countries that offered abundant availability of low-wage, low-skilled workers and that mostly imported technology. However, many emerging markets have developed a skilled labor force and come to produce innovative technology. Successful emerging markets commonly engage in advanced technology research and development, invest in appropriate infrastructure, and engage in adequate policy making. They have become adept at finding market niches and opportunities neglected by more established firms. Moreover, in the wake of the global financial crisis of 2007–9, interest rates plummeted and stagnated in many developed countries for years afterward, leading investors to seek new opportunities in attractive emerging markets (Agarwal, 2016).

In some emerging markets, the state has developed national and international collaborative alliances with private and public enterprises. These may include measures such as the development of training and educational programs to prepare a workforce for a specific market area or the establishment of research centers. Among the most salient examples are India's training and educational centers geared towards satisfying the demand for call centers and computer service and support. Besides satisfying local market and employment demands, these measures and related policies and initiatives, such as creating and supporting necessary infrastructure and anti-corruption measures, continue to attract higher levels of foreign investment.

Startup accelerators have gained traction in emerging markets but face different challenges from those working in advanced economies. They tend to attract more established firms that grow more slowly than their counterparts in developed countries. Despite emerging-market startup founders having comparable levels of education, experience, and entrepreneurship to those in advanced economies, investors perceive them as less committed or prepared and therefore riskier. Moreover, local entrepreneurs in emerging markets seek skills development more than venture funding, need assistance in formulating both talent and financial strategies, and compete with transplanted entrepreneurs for foreign investors' funding (Roberts & Kempner, 2017). With the growth of emerging markets, some countries have a large enough middle class to invest domestically (Baker, 2018).

Certain countries and their economies have grown much more than their peers. Some experts argue for adding nuance to the concept of an emerging market by incorporating new terms, such as graduating emerging markets, that better reflect growth stages. The state of emerging markets is becoming increasingly complex. Not only bankers and portfolio investors are interested in profiting from these countries, but so are major transnational corporations. Many formerly peripheral countries are global market and economic leaders; moreover, they are becoming global political leaders as well.

Viewpoints

The arena of emerging markets has become extremely complex. In fact, experts warn that so many countries are defined by the emerging market category, that the term runs the risk of becoming meaningless. For example, while some countries identified as emerging markets, such as South Korea and Taiwan, do share some characteristics, they may be very different from other countries, such as Mexico, Brazil, Indonesia, Argentina, and Eastern European countries, which are also considered emerging markets. Per capita income is one of the elements used to define an emerging market. However, the per capita income of South Korea is significantly higher than most countries in Africa, Southeast Asia, and Latin America. The term emerging markets, then, has become harder to define. While some countries grow steadily, others can stagnate or even reverse, as several of the BRICS countries demonstrated by the middle of the 2010s, amid slowing growth, political scandal, and international trade sanctions, respectively (Bremmer, 2016). Their fortunes are also tied to the international investment scene, thus making them vunerable also to strengthening economies and changing monetary policy in developed countries (Anstey & Miller, 2018). Therefore, some experts debate the point at which a nation has become a fully developed economy and whether the term emerging market is appropriate or has become obsolete.

Many experts concur that there are four key factors in emerging markets. The first is population. Emerging markets held about 85 percent of the world's population, according to the International Monetary Fund (2018). Population has been a key element in the growth of the Mexican television company Televisa, for example. Mexico has one of the largest urban populations in the world. Televisa reaches beyond Mexican viewership to the rapidly growing Hispanic market in North and Latin America, and its soap operas are also broadcast in non-Spanish-speaking markets.

Another key element that emerging markets share is that they offer few regulations to private industry. Successful firms in emerging markets thrive in a competitive, market-oriented environment. They compete well in the global arena. Because emerging market economies have survived economic crises, some experts consider resilience as another key factor. Openness to market flows is also considered an important element. This includes steps such as lifting import-export barriers and tariffs. These measures, some experts say, facilitate greater foreign investment.

Emerging markets have long been the topic of heated debate. Opponents are concerned about the erosion of democracy and the disappearance of state controls and the welfare state, and critics worry that the poorest or most vulnerable will be adversely affected. Supporters argue that contemporary emerging markets are more efficient, flexible, innovative, and better able to satisfy market needs. These, they believe, will produce greater benefits for all.

Good business practices, ethical policies, and social commitment have the potential to decrease and even reverse the adverse effects of globalization. Nevertheless, the fact remains that inequality has steadily expanded worldwide, most severely in developing nations. The challenge lies in reconciling a successful and growing economy with effective corporate governance systems, business ethics across international corporations, and a just society in which all members, including the least advantaged, truly stand to gain.

Terms & Concepts

Emerging markets: A term coined in 1981 by World Bank investment manager Antoine W. van Agtmael. It refers to the channeling of capital from advanced economies of the world into non-industrialized or developing countries. The concept is based on the important transformations taking place in a developing country, such as economic restructuring and reforms. The common definition of emerging markets is generally loose. The term emerge refers to when a national economy takes steps to join the global economy.

Globalization: A term used and interpreted in different ways, although most versions have elements in common. Globalization's modern inception can be traced to the expansion of the European powers to other continents in the early modern era. It developed with mercantilism, as Europe extended its dominions to colonies and trade outposts in Africa, the Americas, Asia, and Australia. Globalization is related to emerging markets as both are based on international trade and economic and technology developments.

Multinational corporation and transnational firm: These terms are often used interchangeably, although some differences exist. A transnational company is a complex organization that is headquartered at a central site but invests in foreign operations and extends some powers to its foreign operations. A multinational company is headquartered in its country of origin, with a commercial presence in other countries.

Perestroika: A policy of economic and political restructuring in the Soviet Union shortly before its dissolution.

Glasnost: A policy of openness that allowed greater freedom of expression and access to information in the Soviet Union shortly before its dissolution. The goal of Glasnost was to work against corruption and increase transparency.

Developing countries: Countries that have not reached a stage of economic activity strong enough to provide all of its population with the goods necessary to satisfy their basic needs. Basic needs are those that guarantee basic health services, nutrition, education, housing, and services. This concept is related to notions of equality, income distribution, equal opportunities, and development. They are also known as non-industrialized countries, underdeveloped countries, or, in a term increasingly less used, third-world countries.

Developed country: Developed or advanced countries are those with a high level of industrialization, be it contemporary or historic, which are capable of providing their population with a high quality of life. These are also known as industrialized countries, advanced economies, or first-world countries.

Gross domestic product (GDP): The monetary value of the final goods and services produced by a national economy in a specific time frame. The GDP is used to measure the production growth of the firms of each country, albeit solely within its national borders. This indicator is considered representative of the competitiveness of an economy and firm.

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Suggested Reading

Biswas, R. (2018). Emerging markets megatrends. Cham, Switzerland: Palgrave Macmillan. Retrieved October 24, 2018, from eBook Collection (EBSCOhost). http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1850334&site=ehost-live&scope=site

Christensen, S. F., & Xing, L. (2016). Emerging powers, emerging markets, emerging societies: Global responses. Houndmills, UK: Palgrave Macmillan. Retrieved December 28, 2016, from EBSCO online database eBook Collection (EBSCOhost). http://search.ebscohost.com/login.aspx?direct=true&db=nlebk&AN=1218729&site=ehost-live

Kravets, O., & Sandikci, O. (2014). Competently ordinary: New middle class consumers in the emerging markets. Journal of Marketing, 78, 125–140. Retrieved January 1, 2014 from EBSCO Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=97013017&site=ehost-live

Schlager, T., & Maas, P. (2013). Fitting international segmentation for emerging markets: Conceptual development and empirical illustration. Journal of International Marketing, 21, 39–61. Retrieved January 1, 2015 from EBSCO Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87742600&site=ehost-live

Varadarajan, R. (2014). Toward sustainability: Public policy, global social innovations for base-of-the-pyramid markets, and demarketing for a better world. Journal of International Marketing, 22, 1–20. Retrieved January 1, 2014 from EBSCO Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=97479328&site=ehost-live