Emerging markets as a way to alternative investment

1. 1
Chapter 9
Emerging Markets and
Investment Opportunities

2. 2
Learning Objectives
Meaning of Emerging markets.
To understand the special concerns dealing
with emerging market economies.
To survey the vast opportunities for trade
offered by emerging market economies.
To understand why economic change is
difficult and requires much adjustment.
To become aware that privatization offers
new opportunities for international trade and
investment.

3. What is an 'Emerging Market Economy'
An emerging market economy is a nation's economy that is
progressing toward becoming advanced, as shown by some
liquidity in local debt and equity markets and the existence of
some form of market exchange and regulatory body.
Emerging markets generally do not have the level of market
efficiency and strict standards in accounting and securities
regulation to be on par with advanced economies (such as the
United States, Europe and Japan), but emerging markets will
typically have a physical financial infrastructure including
banks, a stock exchange and a unified currency.
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5. Emerging market is a term that
investors use to describe a developing
country, in which investment would be
expected to achieve higher returns but be
accompanied by greater risk.
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6. Determining factors of Emerging Markets
Income.
Lower and middle income economies with per
capita income < $9,656 in 1997.
Financial market depth.
Gross domestic production /GDP < 20%

7. Bloomberg Markets magazine ranked the top 20
based on more than a dozen criteria. The data come
from Bloomberg's own financial-market statistics,
IMF forecasts and the World Bank.
http://www.bloomberg.com/slideshow/201
3-01-30/the-top-20-emerging-
markets.html
https://www.parametricportfolio.com/insig
hts-research/paper/the-opening-of-saudi-
arabias-markets-and-its-impact
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8. 8
The Realities of Economic
Change
 Infrastructure shortages.
 Capital shortages.
 Consumer knowledge is vague.
 Management problem.

9. 9
The Realities of Economic
Change (cont.)
Given the poor market orientation in the previous
business environment, managers must adapt their
behavior in these areas:
Problem Solving
Decision Making
Customer Orientation
DevelopmentTeam Building

10. 10
Adjusting to Global Change
Resistance to change should be
expected in countries that experience
rapid economic and political change.
The established market economies of
the West also must be prepared for
change due to:
The reorientation trade flows
Job shifts
Declines in employment

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International Business
Challenges
.
.
The quality of products can be inferior in emerging market economies.
Lack of protection of intellectual property rights
dissuade firms from investing in emerging market economies
Attempting to source products from
emerging market economies can be problematic
The frequent unavailability of convertible currency makes many
products out of reach for citizens of emerging market economies.

12. Global mix of natural resources

13. Global mix of capital

14. Opportunities for exchange
The mismatch between resources and population
provides an excellent opportunity for trade
(exchange of goods and services).
The mismatch between capital and population
provides an excellent opportunity for investment
(exchange of assets).
Emerging Markets Finance is the vehicles
that facilitate the interchange of
resources and capital.

15. Financial vehicles
Trade finance
Usually short term facilities
Foreign direct investment
Usually cross-border project and corporate finance
performed by multinationals in setting up new productive
capacity. Usually long-term in nature – 5-10 years time
horizon
Recently FDI flows have included services, such as
electricity and telecommunications
Portfolio investments—equity and debt investments in
corporate or sovereign entities
Very volatile
Highly dependent on short-term liquidity conditions, such as
interest rates and US monetary policy

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International Business
Opportunities
Some transition economies have
products that are unique in
performance and can be
successfully traded internationally.
Consumer products in transition
economies are gaining favor
because of competitive pricing.
There are substantial opportunities
for technology transfer.

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Reasons for State-owned
Enterprises
The reasons for the existence of state-owned
enterprises in emerging market economies
are:
Increased national security
Increased economic security
The investment is too large for the private sector
Governments rescue failing private enterprises by
placing them in government ownership
State-owned firms are more socially-oriented than
private firms which are more profit-oriented

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State-owned Enterprises and
International Business
The three types of activities where firms are
likely to encounter state-owned enterprises:
Market Entry
The Sourcing or
Marketing Process
International
Competition

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Drawbacks to State-owned
Enterprises
Competition is restrained, which results in lower
quality of goods and reduced innovation.
The international competitiveness of state-owned
enterprises declines, resulting in the need for
government subsidies.
Many government-controlled corporations are
losing money because the focus is on job
allocation rather than business.

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Reasons for Privatization
Through privatization, budgets can be
reduced and more efficient services can be
provided.
Goods and services can be more competitive
and innovative.
Experience indicates that private enterprises
outperform state-run companies.
Privatization attracts foreign investment
capital.
Governments can use proceeds from
privatization to help fund other pressing
domestic needs.

21. Advantages of investing in emerging markets:
Growth: The biggest advantage of emerging market
Investments is the potential for high growth.
Diversification: International investments can be a good
diversifier for your investment portfolio because economic
downturns in one country or region, including the U.S., can be
offset by growth in another.
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22. Risks of emerging market investments:
Experts often categorize emerging market risk in three ways:
•Political risk. Emerging markets may have unstable, even
volatile, governments. Political unrest can cause serious
consequences to the economy and investors.
•Economic risk. These markets may often suffer from insufficient
labor and raw materials, high inflation or deflation, unregulated markets
and unsound monetary policies. All of these factors can present
challenges to investors.
Currency risk. The value of emerging market currencies
compared to the dollar can be extremely volatile. Any
investment gains can be potentially lessened if a currency is devalued
or drops significantly.
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Privatization Opportunities
for International Firms
Existing firms can be acquired at low cost,
often with governmental support through tax
exemptions, investment grants, special
depreciation allowances, and low-interest
credits.
Since wages are low in countries where
privatization takes place, there is more
opportunity to build low-cost manufacturing
and sourcing bases.
The international firm can act as a catalyst
by accelerating the pace of transferring
business skills and technology and by
boosting trade prospects.

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The Less-developed
Markets
The less developed markets in
the world include countries in:
Africa
Asia
Eastern Europe
Latin America
the Middle East
The emergence of these
markets presents a great
opportunity for citizens and
companies alike.

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The World Economic
Pyramid
Annual Per Capita Income Tiers World Population
More than $20,000
$1,500 to $20,000
Less than $1,500
75 to 100 million
1.5 to 1.75
billion
4 billion
1
2 and 3
4

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Multinational Firm’s Role
Multinational firms have experienced a
high rate of success when entering
transition economies for several reasons:
They tend to enter sectors that allow high profit
potential with minimal capital investments.
They increase in size only after they gain
experience and knowledge of the local markets.
The governments in transition economies award
special privileges to multinational firms.
As multinational firms mature in these economies,
the domestic market itself becomes a market
opportunity.

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World-class Competition
Many economies now recognize that they
must be world class competitors in order to
develop businesses.
Domestic firms enter into joint ventures with
global firms to tap into their knowledge base
and success.
This can be difficult, given that domestic
firms rarely have significant capital to
contribute.

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