Investment in Emerging Markets - Coursework Example

INVESTMENT IN EMERGING MARKETS Student’s Name Course Professor’s Name University City Date Investment in Emerging Markets Introduction Expansion of a business is crucial since it helps in raising the revenue of the firm. Companies need to invest in markets where there is hope of a better investment in the future for their growth (Williams, 2013) More and more enterprises are therefore deciding to invest in the emerging markets to exploit the opportunities that have not been exploited. However, there are some drawbacks that are associated with the decision of whether to invest in the international markets. Therefore, there are important reasons why enterprises are choosing to invest in the emerging markets, though the decision to invest in these markets has drawbacks at the same time. Reasons Behind Investment in the Emerging Markets Superior Profitability The chances of earning high profits in the emerging markets are higher than that of developed markets. Therefore, investment in the emerging markets will give an enterprise an opportunity to exploit unexploited opportunities. Additionally, competition in the emerging markets is not that high as compared to the contest in the developed markets (Svensson, 2000). Therefore, there are few investors in the emerging markets, thereby making it a reason for the firms to have the interest to establish operations in the emerging markets. The high number of opportunities and weak competition translates to large economies of scale which translates high revenue as a result of the more sales. Additionally, labor cost in the emerging markets is low, and therefore the operating cost of the company will lower shooting up the gross profit. For instance, a company in a developed market like China will face higher competition than a company in the Middle East. High expectations of more sales in the emerging markets are, therefore, a reason for investment in the in the emerging markets. Large Number of Unexploited Resources in the Emerging Markets Emerging markets have some resources that have not been exploited. A Large supply of a commodity means that their cost will be lower than the price of a product whose supply is low (Kinney & Raiborn, 2011). Consequently, emerging markets have some resources that have not been exploited and therefore the amount of these resources will be high. In addition to this, the cost of these resources will be lower if checked from an economic perspective. Anon (2017) argues that establishing an operation where the supply of resources is high is an advantage to a firm since operational costs will go down. A good illustration of this can be viewed when a company in a developed country decides to invest in Africa, where some resources have not yet been exploited, and therefore their supply is high and so their price. Lower input prices will lead to low cost of production and in turn, raise the gross profit. Therefore, a large number of unexploited resources in emerging markets is attracting establishment of organizations in these markets. High Growing Number of Consumers There are high expectations that the number of consumers in the emerging markets will grow in number and wealth too. A large population in the future will translate to a higher demand for products in the future. The people in the developing countries are growing at a higher rate than that in developed countries (Prb.org, 2017). Therefore, there are expectations that the demand for products and services in the emerging markets will be higher than the demand in the already developed markets in developed countries. About this, strong demand will provide room for more sales to be made in the future, which equates to higher revenues. Therefore, companies are continuing to invest in the emerging markets in the hope that revenue will increase in the future which will, in turn, increase the value of the company. High growth in the number of consumers in the emerging in the future is, therefore, attracting more enterprises in these markets. Expectation of Increase in Wealth The prospects of growth of the population regarding the wealth of the consumer are attracting firms in the emerging markets. There is hope that a high percentage of consumers in the emerging markets who belong to the lower-class will advance to the standard level. Consequently, the demand for products and services will increase in these markets. According to Pacek (2012), Firms which will have established investments in emerging markets will make more revenue in the future. Threats of doing business are present in the business environment, and only the company which has adapted to the environment will survive. As a result, firms are establishing more and more enterprises in these emerging markets so that when the growth in consumer wealth is experienced, the company will have adapted to the business environment. Prospects of growth regarding wealth are therefore encouraging investment in emerging markets. High Personal Saving Rate The rate of saving of the emerging markets is high. Individuals at emerging markets are saving at a higher rate than those in developed markets. The Higher rate of savings by people in emerging markets prospects that capital will be available in the future for investment. Availability of capital in the future proves that money will be available to carry out economic production and thereby increase economic productivity. Enhancement of economic productivity will encourage private consumptions after some time in future (UN. ECE. Secretariat, 2005). Therefore, if private consumption will be promoted in the future, there is a possibility that spending in the emerging markets will have increased. An increase in spending means that business in the emerging markets will be so good. As a result, enterprises will increase, establishing operations in these markets to benefit from such good business in the future. Therefore, the high rate of saving in the emerging markets provides a chance of economic productivity in the future. Lower Cost of Labor The cost of energy in the emerging markets is expected to be lower than in developed markets. (Gemper, 1990) Argues that labor in the developed markets is expensive since people in these markets are highly skilled and trained. In addition to this, even hiring individuals to perform menial jobs in these markets require them to be paid more. However, most people in emerging markets lack the technical skills needed to complete the job, and they have been used to manual jobs. In addition to this, the rate of employment is also high in developing markets. Therefore, about the demand and supply theory, a large supply leads to a reduction in the prices. Therefore, the large numbers of unemployed individuals in these markets make the availability of cheap labor in the emerging markets to be very comfortable. Availability of cheap labor results in the reduction of operational cost, thereby raising the gross profit. Therefore, cheap labor in the emerging markets is encouraging the establishment of enterprises. Competition is Weak Competition in the emerging markets is not high as competition in the developed countries. Developed market is composed of companies that have operated for a longer period. Working in and a business environment that consists of firms that have performed for long tends to be more competitive that in a market that is developing (Daidj, 2015). As a result, competition in the emerging markets is considered to be low since few enterprises have settled there and those present have not been operational for an extended period. Therefore, this will attract firms that are feeling the heat of competition in the developed markets to the emerging markets where the competition is not so high. In addition to this, businesses which cannot stand the competition in the in the developed markets will move to the emerging markets so that they don’t close. Weak competition in the emerging markets is attracting more and more organizations to set up businesses there. Ease of Doing Business There is some business in the emerging markets that are yet to be regulated. According to Marr & Reynard (2010), to encourage more investment in the emerging markets, regulation has been made accessible for those who need to invest in these markets. Therefore, investment in emerging markets comes with advantages since countries which are ready to boost their economies ensure that there is no bureaucracy in doing business. To eliminate red tape, the government in power has to make sure that some policies that hinder operations in these countries are removed. As a result, this will attract more investors from the international market. Therefore, a business that needs to expand to international markets will expand into those markets that do not have bureaucratic procedures to set up operations. About these, the markets that enterprises will get attracted to are the emerging markets. Few regulations in the emerging markets, which are there to encourage investment draws establishment of firms in these markets. Risks Facing an MNE In Relation to the Kentucky Fried Chicken Company (KFC) When Deciding Whether to Invest in an Emerging Market 1. Culture Hindrance Culture is simply defined as the way of doing things. Organizational culture refers to the way of doing business in an organization while the culture of a society refers the way of doing things according to the norms of particular groups of people in a region or a country. Therefore, culture hindrance is one of the risks that face multinational enterprises when deciding whether to invest in the international markets (Motamen-Samadian, 2005). An example to illustrate this is the Kentucky Fried Chicken Company (KFC) which is involved in the business of selling fried chicken. In the above example, when the company is deciding to invest in the emerging markets, the culture of the community in the market must be learned. Consequently, the company can choose to invest in an emerging market where the culture of the city does not allow consumption of chicken. The way a community does things is, therefore, a risk facing international companies when investing in the global markets. 2. Tax laws Tax is the proportion of an amount of money that contributes to the government from the business profits to carry out development activities. According to Besley & Brigham (2014), different countries have different tax laws operating in the international markets. Therefore, the tax laws in the home country of a multinational company. Therefore, the effects of changes in the tax laws must be felt when a company decides to invest in a different market outside the home country where they are different. For instance, KFC has its origin in America. The company might choose to open an investment in China, where the tax laws are different from its state of the source and which encourage the operation of local enterprises. Therefore, the company will be slapped with heavy taxes to discourage it from operating. It is, therefore, apparent from the above example, that multinational corporations face the risk of being hit with strong tax measures that might discourage them if proper research is not done. 3. High Operational Costs The cost of operations is defined as the value of the resources that will be used in an enterprise for production. If the cost of service is high in the business, the revenue will be less. In emerging markets, weak infrastructure might force the operational cost to go up because the raw materials might be sourced from very far adding the transportation cost (Breton & Zaccour, 1991). Consequently, the operational cost increases, lowering the revenue of the company. Therefore, where a company decides to invest in the emerging markets, there is a risk that the operational cost of the business will go up and in turn lowers the expected revenue. KFC might decide to invest in the international market, but the operational cost in a global market like in Africa might make its business costs to rise. Raw materials in Africa might be available, but the cost of production of KFC will increase lowering the revenue. Therefore, the high cost of resources used in production expose the enterprise to a risk of lower revenues. 4. Lack of Skilled Workers in the Emerging Markets Skilled workers are crucial to an organization to ensure quality production. According to Khanna, Palepu & Bullock (2010), emerging markets lack people with enough skills to ensure quality production. However, in some international markets, some government institutions provide that for a company to be allowed to operate in that country, employees must come from that particular company. However, employing nationals is possible, but skilled workers might be a problem. About this, quality might be compromised. In Kentucky Fried Chicken Company, the company may decide to enter in the emerging market where finding skilled chefs to prepare quality chicken as per the enterprise require and its customers are a problem. As a result, the reputation of the company will be negatively affected which might the sales made at the outlet in the international market. Therefore, multinational corporations are at risk of lacking the skilled workers, which will interfere with quality produced and in turn the reputation of the company. 5. Bureaucratic Procedures in the International Markets Bureaucratic process in the global markets refers to the guidelines that might be followed to set up an operation in the international market. Therefore, when enterprises are deciding to venture into the emerging markets at international levels, procedures that must be followed to start operation must be considered (Wilson et al., 2014). Health is a concern in every part of the globe at companies dealing with the production of commodities to be consumed must ensure that they abide by the health regulation. About this, countries have therefore set up procedures that must be followed by these companies to make sure that what is produced is healthy for consumption. In the case of KFC, the company is dealing with consumable products. Therefore, the company might find itself in interlocking paths where the procedure is so much bureaucracy and challenging. Therefore, multinational corporations are being faced with the risk of bureaucratic procedures which might be tough to follow while joining the emerging markets. Conclusion In brief, investment in the emerging markets gives a firm a chance to grow internationally. As a result, the company enjoys high profits as a result of investment in the international markets due to the large supply of resources which are available in these markets. Also, investment in emerging markets is encouraged due to expectations of future benefits like the expectation of growth in the number of customers in the future and high personal savings which give an expectation of strong economic productivity in future. Labor is also cheap in these emerging markets lowering operational costs while the doing business is easier since these markets want to encourage investment. However, firms that want to venture into these emerging international markets have some risks that face them. About these risks, culture hindrance, tax laws, increase the cost of doing business, lack of skilled workforce in these markets and bureaucratic procedures in these markets are the example of risks that face these companies. In short, the discussed reasons are motivators that inspire business to venture in the international markets while at the same time the firms must consider the risks associated with emerging markets. References Anon, (2017). 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