Evaluate the impact of the emerging markets on the global world economy in the next 5 years

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1.        Question: Evaluate the impact of the emerging markets on the global world economy in the next 5 years and discuss how the economic integration will take place between the “old” economy and the “new and emerging” economy, in particular, whether the emerging markets will present the international manager with barriers to market entry

 

1.1    Evaluation of the impacts of the emerging markets on the global world economy in the next 5 years

 

The term “emerging markets” appeared in the beginning of the 1980s and was initially used to designate financial markets located in developing countries according to the World Bank’s country classification. Indeed, all economies with low and middle Gross National Income (GNI) per capital are categorized as developing countries and this classification causes some confusions. In 1981, the International Finance Corporation (IFC) proceeded to an explicit distinction between emerging countries and developing countries. The criteria used by the IFC to attribute emerging status include not only income criterion, but also stock market’s size, level of development and degree of opening[1] (Arouri, Jawadi & Nguyen 2010, p. 2).

 

1.1.1            Serve as the world’s economic growth engine

Estimates show that 70% of world growth over the next few years will come from emerging markets, with China and India accounting for 40% of that growth. Adjusted for variations in purchasing power parity, the ascent of emerging markets is even more impressive: the International Monetary Fund (IMF) forecasts that the total GDP of emerging markets could overtake that of the developed economies as early as 2014. The forecasts suggest that investors will continue to invest in emerging markets for some time to come. The emerging markets already attract almost 50% of foreign direct investment (FDI) global inflows and account for 25% of FDI outflows (ey.com 2010). With the continued slow economic growth in the developed countries, it is expected that the emerging markets will act as the economic growth engine of the world’s economy in the coming several years.

 

1.1.2            Redefine the global economic structure

 

The term global economic structure mainly refers to the rule of the game on how the world is governed economically. And there are two ends of a spectrum: (1) a market economy and (2) a command economy (Peng 2009, p. 39). When the market economy involves market shaped by the market players excluding the governments, the command economy describes the influence on the economy activities by the governments. As a matter of fact, most national economies as well as the global economic structure are all shaped by both the market economy and also the important role of the governments. The raise of the emerging markets has influential impacts over the forming of the current and future global economic structures.

 

For example, the rapid growth of emerging economies has led to a shift in economic power. Forecasts based on analysis by late economist Angus Maddison suggest that the aggregate economic weight of developing and emerging economies has been surpassing that of the countries that currently make up the advanced world. According to Perspectives on Global Development: Shifting Wealth, a new publication from the OECD Development Centre, the economic and financial crisis is accelerating this longer-term structural transformation in the global economy, as the following figure indicates, in 2010 the purchasing power contributed by the developing and emerging countries had already been equal to that from the advanced developed countries (oecd.org 2010).

Figure 1 Share of the global economy in purchasing power parity terms

Source: oecd.org 2010

 

1.2    Economic integration between the “old” economy and the “new and emerging” economy

 

1.2.1            Obtaining market share in the developed economies for companies in emerging markets

 

While traditional thinking has been that the multinational corporations (MNCs) are vivid in expanding their market and manufacturing procedures into the developing countries, with the current economic integration between the “old” economy and the “new and emerging” economy, another trend that has been identified is the global business practices is that the companies from the emerging markets are actually expanding their presence into the developed markets. For example, Chinese companies, particularly the major ones, had come to realize their weakness in product development, branding and sale network which means that they already face fierce competition from the multinational companies in their domestic markets (Pan 2009). And according to Bernadette Andreosso-O’Callaghan and M. Bruna Zolin (2010, p. 138), obtaining market share abroad is a way of strengthening the Chinese large and medium sized companies’ competitive advantages, including through economies of scale. In some particular industries such as the telecommunications equipment, they have targeted both emerging and developed markets.

 

1.2.2            Relocation of activities in the emerging markets

 

The growth of international sourcing has also resulted in the relocation of activities overseas, sometimes implying the total or partial closure of the production in the home country while at the same time creating or expanding affiliates abroad producing the same goods and services as in the host country. More often, it is about the substitution of domestic stages of production by activities performed in foreign locations, with goods and services being exported from the host country to the home country. Relocation is not always interpreted in such a strict sense, and often encompasses different forms of internationalization (oecd.org 2007). And in term of the detailed business activities to be relocated oversea, low cost is not always the top priority to make the relocation decisions. Rather, most MNCs from the developed economies would prefer the emerging economies rather than those totally underdeveloped markets for two major reasons: first of all, emerging markets usually provide relatively more efficient labor, transportation service and other resource than the totally underdeveloped markets such as some African countries because emerging markets such as some Asian countries have already had the skilled labor and other resources which are more productive; secondly, secondly, the emerging markets usually come with raising market demand because the income level of the people there is rising rapidly with the growth of the economies and therefore the relocation of the business activities, especially the production processes will benefit the final sale of the products and services in the local markets. And it is expected this trend of relocation of the business activities will continue to happen in the emerging markets with the deepening of the economic integration between the “old” economy and the “new and emerging” economy in the coming few years.

 

1.3    Management of barriers to market entry in emerging markets

There are two trends that shape the barriers to the emerging markets: globalization and regionalization. On one hand, the globalization trend increases the dependency between the economies and pushes forward the reduction of the trade barriers and marker entry barriers between the developed and emerging market. In particular, the various inter-governmental organizations provide platforms for facilitating such reductions. For instance, the US has used the WTO to seek help to open the market in China after the China’s accession into the WTO in 2001. According to the news in 2007, the Office of the U.S. Trade Representative (USTR) had asked the World Trade Organization (WTO) for assistance in convincing China to ease its trade policies restricting the importation and distribution of copyright-intensive U.S.-made products like movies, DVDs, music, books and journals. The U.S. wanted the WTO to establish a dispute settlement panel to study and recommend changes to Chinese laws denying U.S. companies the right to import such copyrighted, creative products (Longley 2007). Similar cases happen all the times in the WTO platform as members from developed countries are seeking to exert pressure on the emerging economies to open up their markets.

 

But on the other hand, emerging economies also have tools and organizations to protect their interest and weak domestic industries. One typical example is the establishment of the ASEAN which was established on 8 August 1967 in Bangkok, Thailand, with the signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand[2] (aseansec.org 2011). One major way that these emerging economies raise to protect their weak domestic industries is to establish regional trade barriers to provide room for development within the regions. For example, in the first of January 2002, ASEAN took a significant step toward regional economic integration, when each of the six original signatories to the AFTA agreement – Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand – had to bring down tariffs on almost all their trade with one another to 0-5 percent which was six years earlier than the date originally set when the AFTA agreement was signed in 1992 (aseansec.org 2002). The establishment of the AFTA agreement is another form to create barriers to the companies from outsides of the region and protect the weak domestic business.

 

[1] Sees appendix 1.0 for the detailed criteria for emerging countries

[2] Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July 1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999, making up what is today the ten Member States of ASEAN.