Opportunities and Risks of Investing in Emerging Markets

Emerging markets are economies that have some, but not all, features that are strikingly similar to emerging economies. Brazil, South Africa, China, and Russia are examples of such markets, as are India, Nigeria, Mexico, and also the Asian tigers. The sustained high rates of gross domestic product (GDP) growth and a rise in per capita income are two of the most common characteristics of emerging markets. The question of whether the benefits of investing in emerging markets are adequate to outweigh the inherent risks is addressed in this article. With an emphasis on the affirmative position, this essay concludes in favor of the former rather than the latter statement.

Opportunities of Investing in Emerging Markets

Investing in emerging markets has a number of advantages and presents numerous opportunities. Such markets are still on a relatively stable growth trajectory and are yet to reach maturity as is the case of developed economies. In this manner, therefore, such markets present enormous opportunities for entities looking to invest in growing industries. Using the product life cycle analysis, according to Lapasinskaite and Boguslauskas (2015), investing in the emerging markets confers the opportunity of enjoying ever growing revenues and profits as time goes by due to their steady and sustained growth (as indicated in Figure 1 below). Comparatively, many developed markets are at the late maturity stage or are experiencing the decline phase of the product life cycle analysis. For developed market-based business entities seeking to grow their presence in their respective industries, the emerging markets offer a desirable chance to realize it. Additionally, the emerging markets offer a diverse market segment for entities seeing to expand their operations out of developed economies as they have different demographic attributes.



Profit / Revenues



Intro Growth Maturity Decline





Revenues





Profits



Time

Fig 1: The Product Life Cycle Analysis Outlay (Source: Stark, 2015)

Emerging market economies boast of a generous endowment with natural resources, including minerals, oil, petroleum, agricultural opportunities, and good climate, all of which are important factors that go towards creating the inputs used in the production of commodities. According to the viewpoint of Cavusgil, Ghauri and Akcal (2012), these benefits make the overall costs of production cheaper in the developing nations than in the developed economies. The easy and wide availability of the natural resources helps cut the cost of transportation, therefore making the emerging economies a desirable location for entities who use such benefits in their production efforts. Comparatively, emerging markets offer the opportunity for entities to reduce the overall costs of operation while increasing their profit margins due to the reduced costs incurred in acquiring inputs used in the production of commodities.

Many emerging economies boast of high populations, with 2.4 billion people living in China and India alone. Brazil, Indonesia, and Nigeria each have populations of more than 150 million people. Eliott (2014, n.p.) notes that with such high populations, many emerging economies have comparatively lower costs of labor, which makes them more lucrative for entities whose production processes are labor intensive. The low costs of labor offer an opportunity for such firms to reduce the expenditures on operation while increasing their profit margins; essentially, such markets are a great investment destination for entities from developed economies. The high population of emerging economies also offers an opportunity for entities to access a bigger market and in the process increase the revenues arising from the sale of commodities. In support of this premise, Milanovic (2013, p.201) notes that China and India are among the biggest importers of commodities in the global market; many of the other emerging economies, who are net importers of commodities, also offer a market for commodities from developed economy-based business entities. According to Statista (2017), in 2016 alone, China imported more than 2 trillion dollars in value of commodities, while India imported some 359.07 billion dollars in goods, and Brazil 143.7 billion dollars respectively. Such figures illustrate the large scope of market that the emerging economies offer through their billions of residents.

For emerging market economies, the comparable weaker exchange rates make investment more desirable for foreign firms. In relation to this particular advantage that firms may enjoy, Eliott (2014, n.p.) notes that entities based in many of the world’s developed economies find it more desirable to invest in emerging economies as the dollar tends to go much further there. Differential currency strengths also make factor inputs such as labor and capital much cheaper in the emerging markets than in the developed economies, hence reducing the overall costs incurred in the process of producing commodities, which offers firms the opportunity to produce commodities more cost effectively than in developed economies. The exchange rate effect also brings the advantage of offering higher commodity prices for entities, allowing them to increase their margins, particularly by investing little in terms of foreign exchange and earning more in terms of local currencies. Many emerging markets have set regulatory frameworks and policies aimed at attracting foreign investment from developed economies. Kim and Mauborgne (2014) point out that such economies may offer incentives in terms of lower taxation for foreign entities and relaxed regulations, for instance, minimum labor laws which may often not exist. In addition, they may offer business entities the opportunities to produce commodities comparatively cheaper in the long run than in developed economies.

Risks of Investing in Emerging Economies

At times, investing in emerging economies may turn out to be bringing more risks than opportunities. Many emerging market economies are reliant on and can be influenced by a number of foreign factors, including but not limited to exchange rate fluctuations, oil prices, and economic shocks from other nations. Because of this, many economies within the league of emerging markets are not stable, a fact that may pose great risks to the investments made by foreign entities within such economies. An example is the 2008 financial meltdown, in which, as Aizenman and Hutchinson (2012) succinctly point out, a near collapse of the US markets was felt in most parts of the world, and more specifically within many of the emerging markets. The sociopolitical environments in nations over which foreign and local entities have no control may also affect the economic performance in the emerging markets, hence posing a risk to any possible investment that may be made in such economies.

Firms looking to invest in the emerging markets may also face the risk of lower demand than projected. In selling their commodities to the residents of such nations, foreign entities may overestimate the actual demand for such products due to the deceptively high populations. Cavusgil, Ghauri and Akcal (2012) note that even though in theory, the emerging markets offer a huge market for commodities, and in practice, the market may be comparably smaller due to several attendant factors, including a difference in consumer culture, high levels of poverty, and a preference for cheaper/counterfeit products, which may be attributed to the ignorance of consumers. Further, lower overall demand for commodities in the emerging market economies may be brought about by the lower per capita incomes in those particular countries, which may lead to reduced revenues and possible lead to the risk of losses for entities investing in such nations.

Reflections

Generally, the opportunities of investing in emerging markets seem to outweigh the risks of such investment, which may include the possibility of exchange rate fluctuations or external shocks and consequently expose such economies to the risk of stagnation. Another risk associated with investing in such emerging markets is the sociopolitical instability which may spill over and affect the outlook of the economy, and consequently the performance of the investments made in such markets. In addition, investing in the emerging markets comes with the risk of corruption or political interference, which may distort the incentives that attract such investments.

On the flip side of things, investing in emerging economies comes with significant opportunities, including access to a huge deposit of natural resources that can be used as input in the manufacture of commodities, hence reducing the associated costs of production such as transport. Additionally, the high population in such economies offers a pool of cheap labor and results in lower costs of production. The high population also offers a ready market for the commodities and services that the investment made in such markets seeks to offer. Weaker regulatory regimes and a sustained economic growth also offer a great opportunity for investing in emerging markets by creating a conducive environment for the operation of firms and a stable economy that can create returns for foreign investment. Summarily, the opportunities of investing in emerging markets outweigh the associated risks.





































References

Aizenman, J. and Hutchison, M.M., 2012. Exchange market pressure and absorption by international reserves: emerging markets and fear of reserve loss during the 2008–2009 crisis. Journal of International Money and Finance, 31(5), pp.1076-1091.

Cavusgil, S. T., Ghauri, P. N., & Akcal, A. A., 2012. Doing business in emerging markets. Sage Publications.

Elliott, L., 2014. Mint condition: countries tipped as the next economic powerhouses. [Online] The Guardian. Available at: https://www.theguardian.com/business/2014/jan/09/mint-condition-countries-tipped-economic-powerhouses [Accessed 29 Nov. 2017].

Kim, W. C., & Mauborgne, R. A., 2014. Blue Ocean Strategy, expanded edition: how to create uncontested market space and make the competition irrelevant. Cambridge, MA: Harvard Business Review Press.

Lapasinskaite, R., & Boguslauskas, V., 2015. The maintenance cost allocation in product life cycle. Engineering Economics, 44(4), pp. 17-23.

Milanovic, B., 2013. Global income inequality in numbers: in history and now. Global Policy, 4(2), 198-208.

Stark, J., 2015. Product life cycle management. In Product Life Cycle Management (pp. 1-29). Springer International Publishing.

Statista.com, 2017. China: total imports and exports 2016 | Statistic. Statista, https://www.statista.com/statistics/257252/import-of-goods-to-china/.