Market Entry and Managing Risks in Emerging Markets
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The term emerging markets, also called developing markets, refers to those markets comprised of countries or nations that have rapidly growing economies, high rate of industrialization, and a high household income growth rate. These nations tend to hold the largest economies, for instance, China and India (Gibley, 2012). These emerging markets are turning out to be the biggest players in the domination of market for their goods, services, and labor. According to the International Monetary Fund (IMF), these countries that dominate the emerging markets make up to 82 percent of the total world’s population.IMF also states that the total world economic output produced by these countries measures up to 32 percent. International Monetary Fund also estimates the growth rate of the emerging economies to be two or more times faster than the developed markets (Gibley, 2012).
This research paper highlights some of the differences that emerge between the emerging and the developed economies or markets with reference to countries like China, Brazil, and India. The paper will also look at types of risks that emerge as firms are seeking new markets in different regions. This will include a thorough analysis of the international risks that face the new markets and the stage in which these risks evolve or change. Different risks are faced in different situations. This paper will also highlight the certain types of risks that occur or apply in the different types of circumstances. Some of the examples to be sought include those leading emerging markets like Russia, China, Brazil, and India.
Differences between the Emerging and Developed Markets
The emerging markets differ from the developed ones on the basis of the characteristics that they depict. The emerging markets tend to depict a rapid rate of growth in terms of the economy. This can be attributed to the adaption of the economic development programs that deal or focus mostly on the growth platform (Gibley, 2012). The International Monetary Fund (IMF) estimates that the emerging markets are developing two or three times faster than the developed economies. This is confirmed by the April 2012 IMF estimates. This helps in the growth economically because it assures key drivers of economy like investors that the revenues of different corporations have the capability of growing. This attracts the investors even from other sectors of the economy (Tugberk, 2011).
The high growth rate can also be attributed to the potential that comes with emerging markets to discover and explore new companies that are coming up. The explanation that is given to this is the fact that the information regarding the market is less available to the few stocks analysts. Some of those investors that invest in these companies will be confident of very high returns. The emerging markets also tend to perform in a distinct way from the developed markets. This is so because the strategies employed are those that aim at acquiring the market share that they do not have. In the course of this, these markets tend to help the investors to diversify their different portfolios, hence increasing the growth of the economy (Gibley, 2012).
These emerging markets also comprise very young working generation that have the manpower to do works better and faster with minimal cost. This greatly adds to the economic growth since the economic output is very high, the health care costs are also minimal compared to the retiree generation, and there is less need for the services from the government. Another reason attributed to the high growth rate is the richness in the natural resources. The presence of the natural resources in large shares tends to benefit the economy as industrialization takes effect. An example is Brazil. The self-reliance of Brazil on oil has saved the country from excessive cost or expenses catering for fetching of oil. Brazil also has a large area of land in terms of farmable lands. Self-reliance strengthens the economy and prevents it from facing risks that may degrade or slow down the economic growth (Tugberk, 2011).
Compared to the developed markets, the emerging markets have low levels of both the government and consumer debt (Gibley, 2012). The low government debt levels can be attributed to the high produce compared to the buying pattern. Producing more produce enables the government to cater for the citizens without borrowing from others at the same time, exporting the excess to earn the government revenue in terms of foreign revenue from the foreign exchange. Other large state-owned companies also help in generating the government revenues through exporting manufactures products or raw materials. Increase in the government revenue helps to prevent government from borrowing, hence the debt levels are kept low. Similarly, the revenue is enough to aid in the funding of construction of the infrastructure and other projects that the government undertakes to promote or raise the living standards of people.
In terms of the consumer debt, the emerging markets, for instance, China have very low trading deficit. Trading deficit is what generally compels business or individuals to borrow with the aim of making profit from the products or service they intend to produce or generate. The low debt levels are attributed to the strong foreign trade. China is well-known for dominating and penetrating markets mostly in the developing countries or the third-world countries, for instance, in the African countries (Gibley, 2012).
Emerging markets also tend to have low or intermediate household incomes. In the European Union, for instance, the per capital income tends to range from 10 percent to 75 percent according to the GDP (PPP). The main reason China is termed as an emerging market despite the fact that it is the second largest economy in the world is due to the low levels of income that a household earns. This means that income levels are about a tenth of the household incomes in the United States of America. However, the household income is described as growing (Gibley, 2012).
The rising household income is what guarantees the consumers or the citizens the ability to have different plans for the income they earn, profoundly some set for the purchasing. Countries like India and China have very low level of the income per person compared to other countries that have developed economies, for instance Germany, United States of America, Japan, Canada, and South Korea. The income per person in China approximate to 5,414 dollars per person while India pays 1,207 dollars per person, according to International Monetary Fund estimates (Gibley, 2012).
In line with the governance of the country and the administrative bureaucracy, the emerging countries have also instituted very reliable fiscal policies. The strong policies came as a result of the economic crisis that faced the countries in the past. An example is Brazil. Since the year 1994, Brazil has developed a strong fiscal discipline that has seen the inflation levels fall from more than 100 percent to at most 5.4 percent in the last five years. The strong policy has also led to reducing the government levels that have resulted into a credit rating of the investment grade (Gibley, 2012).
The labor costs also tend to be low in the emerging markets. This helps in speeding up the development and growth of the economy. An example is the Philippines that are the key drivers in the manufacturing of the electronics and call-centre industries. This is attributed to the availability of the labor resources. This is brought forth by the good governance in the country. According to the IMF, the confidence garnered by the international financial markets in a country is highly powered by good governance. The institution that is led by adequate and reliable authority develops a path for a strong and a stable development in the economy (Gibley, 2012).
Emerging markets are also marked by underdevelopment in institutions, both government and private. The positive remark about this is that the institutions are undergoing transformations and economic openings. The emerging markets are marked with rapid restructuring of the economy within lines or criteria that are market oriented. They offer a large stretch of wealth in terms of the opportunity. These opportunities range from trade to foreign direct investments, transfers, and development in technology. The emerging countries, for instance, China, India, Brazil, Indonesia, and Russia stand out as economic powerhouses that empower the economy regionally. They are also marked with large population, markets, and resource bases. Large population can be evident from the large number of people in China totaling to billions of people. It is this large population that provides the market with goods and products as well as providing the manpower to manufacture and produce goods less costly (Gibley, 2012).
Risks Involved in Market Entry
Some of the reasons that a country or company goes international are to diversify or spread the risks. One of the risks that corporations face on the international levels or even national levels is political instability (Kipmcc, 2009). The emerging markets could be faced with a problem of instability in the area of politics. Examples of this include the coups, external conflicts between governments, and internal conflicts. The environment that is faced with such hostility will be very difficult to operate in. For instance, during the entry into the market, the company will face the risk of adapting to the culture of the people and integrating the products or services into the market. Once the company is stable economically in the country, it then faces actions like takeovers from the countries that have instability.
Instability in this case is defined in terms of lawlessness and abuse of authority. This could lead to other associated risks like hiking of the taxes on all the corporations that are not local. Paying very high taxes reduces the corporate revenue and hence exposes the corporation to debts. Lawlessness can also lead to organizations being formed by employees demanding increment in their wages beyond the limits put in place. This exposes the corporation to closure or making losses (Kipmcc, 2009).
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The regulatory environment of the emerging markets does not a favor of development due to its nature of underdevelopment. During the entry, the corporations may be faced with tight restrictions, hence will not be able to freely operate in that environment. This lowers the corporation’s ability to make profits. The market regulations and corporate governance that exist could pose a major challenge to the running of the business. Similarly, the accounting standards and the transparency benchmark that is set may not be reliable. The country may also impose heavy taxes on the company, hence reducing the profitability. However, after the entry into the market, the corporations could negotiate with the host government in terms of labor resources, other allocations, and the taxes paid (Kipmcc, 2009).
The corporations also face the cultural risks. This is evident from different cultural backgrounds countries have. The inability of these corporations to adapt or appreciate the differences in culture that exists could pose a barrier in its operations. Language barrier is a major consequence associated with different cultures. The result of these barriers is conflict in the operations of the business. This is a risk mostly faced when the corporation is entering the new market. After the entry, the corporation is likely to get used to the culture and with time adapt to various standards imposed by the culture (Husdal, 2008).
The corporations are also faced with the foreign exchange and the interest rate risks (Tielmann, 2010). The multinational corporations that, for instance, hold multiple subsidiaries in other countries for the purposes of expansion of markets and search for raw materials are most likely to face this risk. This is due to multiple transactions that they undertake during the transportation of products to the retailers or wholesalers abroad or transportation of the raw materials to the manufacturing plant. Also, whenever payments for products and services are done in the international market, there will be the risk of fluctuation in the foreign exchange market. This could lead to a situation when the buyers are paying more and receiving less with reference to the local currency. The interest rates are volatile and are determined by many factors. Any change in the factors that affect it could lead to an increase resulting in high cost of loans. These risks exist all the time. The risks are not changed by the time of entry in the market or the existence in the market (Husdal, 2008).
Circumstances that Yield Different Risk Preferences
Different types of risks apply to different sets of circumstances. This is because of the difference in the environments that the businesses operate in. For instance, different governments have different regulatory authorities that advocate for different policies and guideline. Countries too have different cultural backgrounds that advocate for different tastes and preferences in terms of the services and products they are offered (Tielmann, 2010).
Also, the difference in the set of circumstances can be attributed to different geographical locations that the countries are in. For instance, a country located along the coastal lines will face risks that are completely different form the country located in desert dominated places. Similarly, countries have different political frameworks. The difference in the leadership is what exposes the country to political risks. For instance, a country ruled in dictatorship will be more exposed to the political risk compared to those that are ruled democratically (Tielmann, 2010).
The emerging markets, as researched above, are mainly characterized by high population, low levels of household income, rapid growth of the economy, and high investment in foreign markets. The reason for the rapid growth in the emerging markets is summarized to be the employment of different strategies from those employed by the developed markets. The paper has also explained some of the international risks that the multinational corporations face as they expand to either look for newer markets or search for raw materials. The paper has also expounded on the reason why there are different circumstances that influence different types of risks. Some of these circumstances have been attributed to different geographic locations that have different climatic implications. The political framework, which governs the regulations of a country, also affects or influences the circumstances in which a country faces risk. The paper has relied on articles and books that are related to the topic as means of referencing and citation of texts.
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