Emerging Economies

Emerging economies are nations comprising of the world’s major potential markets which include global brands and innovation. They are showing quick economic growth due to industrialization, market growth, liberalization of investments and trade policy reforms. They have rich market opportunities and high demand for both consumer and industrial products and services. Emerging economies include, the combined economies of Brazil, Russia, India and China (BRICs) appear likely to become the largest global economic group by the middle of this century. (Cheng, Gutierrez, Mahajan, Shachmurove, and Shahrokhi, 2007)

They account for more than a quarter of land area and 40% of the world’s population. An increase in the world’s GDP by 36.3%, income per capita and currency movements are estimated in the BRICs economies until 2050. They make up about a quarter of the global economy. It is estimated that the real exchange rates of China could appreciate by up to 300% over the next 50 years.
Considering the growth and resources in emerging economies, MNCs are penetrating these markets by making investments through joint ventures, alliances, and acquisitions. MNCs support the transfer of technology and knowledge, which stimulates the economic growth of developing countries. But they are confronted by the opposite force i.e. regulatory control imposed by the host government. MNCs have to work in a framework of cooperation and competition with the government. As MNCs carry out production in the host countries, it controls and manages their assets and production activities. Government regulations are important as without them MNCs may take over the market at the cost of local producers through anti-competitive procedures. The government fosters fair competition between local companies and foreign companies. MNCs should know laws, culture and business practices of the host economy. According to Yu and Lin (2008) MNCs, foreign nationality can become a liability particularly when local institutions, including governments, non-government organizations, and societies in a given country, use it as a lever to achieve other objectives e.g. introducing tougher legislation, lobbying against FDI, etc.

In BRIC countries, the government is heavily investing in the industry, education, infrastructure, healthcare, tourism, and housing to increase GDP, facilitate FDI inflows and maximize their returns, support exports, and imports and increase employment and wealth.

The government regulates the entry and production activities of MNCs by rendering restrictions on their market access through the Rights of establishment notification, screening, shareholding, etc. They may negotiate economic partnership agreements (EPAs) and free trade agreements (FTA) integrating investment protection to limit and monitor investment. China’s government has e direct influence on its corporate strategy. E.g. in 2005, China’s State Council urged that state-owned enterprises reduce excess capacity in steel industries (AsiaPulse News). The foreign organizations have to face domestic laws and regulations including labor law, trade related requirements (TRIMS)

The main criteria of government policies in emerging economies are first, to attract FDI and secondly to promote linkages between foreign and local enterprises. (Mathews, 2006; Pananond, 2007; Petrou, 2007; Wu and Chen, 2001). Government policies are essential to facilitate FDI inflows and maximize their returns. This provides huge flows of money for costly and risky M&A (Buckley et al., 2007; Kalotay, 2008). Virtually, 417 acquisitions have been carried out by BRIC companies in Europe and America between 2000 and 2007.

The government’s policies encourage export promotion by trade promotion organization (TPO). For export and import development, the government responds to policies that attract FDI. Liberal government policies create a comfortable business environment between MNCs and the legal framework of the emerging markets. Hence producing additional foreign exchange to cover the cost of imports, create employment and reduce the burden of foreign indebtedness. Export promotion widens export base in emerging countries. For instance, The Chinese government has streamlined outbound FDI to promote foreign investments. This has increased their net exports and imports.

FDI directly leads to increased international production. E.g. emerging market FDI outflows have tripled from US$100 billion in 2000 to US$350 billion in 2008 (UNCTAD). China has attracted US$14.09 billion in FDI in 2010.

FDI contributes to investment, employment and benefit local people through new technologies and HRM expertise. This arises through linkages between foreign investors and local firms such as suppliers, customers, and competitors. Governments promote linkages by assisting local SMEs for foreign investors. As government policies are getting more liberal, they are opening industries which were closed by FDI. They are also streamlining the approval procedures. For example, in China, FDI is streamlined and authorization is transferred to a government where investment below $300 million will be examined by local authorities. The government’s promotional agencies foster FDI-friendly policies, identify potential sectors and investors, and structure specific deals and incentives for MNCs. The policies also develop their workforce and convene the employment needs of foreign investors.

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