International Business in Emerging Markets - Brazil, Russia, India, and China - Coursework Example

Intеrnаtiоnаl Business in Еmеrging Маrkеts By Professor Class University City Date of submission Introduction In the manufacturing world, emerging markets have been able to show significant roles in the past years. The World Bank coined the term emerging market in 1981 to reflect an economy with a per capita income in the low to medium range. Countries considered emerging markets have a speedy rate of economic regression and passage of remarkable monetary reforms. Besides, the major characteristic of these countries is the increased foreign direct inflows, a prosperous middle class, and increased consumer spending (Pacek & Thorniley, 2007, 187). Typically, these countries face heightened amount of economic exposure and political risk. Long downgraded to the second-tier position, the emerging market companies are becoming important forces and agents of changing global industrial and financial landscape. The commonly known emerging countries are the BRIC countries like Brazil, Russia, India, and China. These markets are distinguishable from other markets by their demographic and economic potential to position as the most influential and largest economies in the 21st century (Montiel, 2003, 132). Together, these countries contribute approximately 2.8 billion people reflecting 40% of the world’s population and accounting for more than 25% of the global GDP. In this case, the research will focus on China as an emerging market, its industrial structure, economic indicators, and theories that support international trade of the China. Figure 1: GDP Performance of the BRIC China’s Industrial Performance China is the second-largest economy after the United States by the nominal GDP and purchasing power parity. Moreover, it is the fastest growing major economy in the world with growth rates averaging to 10% over the last three decades. China is the largest exporter and the second largest importer of manufactured products (Jayaraman, 2009, 158). On per capita income basis, the country was in 90th position in 2011 as per the research conducted by the International Monetary Fund (IMF). The provinces found in the coastal regions of the country tend to more industrialized whose in the hinterland are less developed. Since the economic importance of the country of grew over the last decades so does the attention to the structure and health state of the economy (Kynge, 2015, n.p). As an emerging and developing economy that mainly focuses on the export-oriented manufacturing sector, currently, the Purchasing Managers Index (PMI) dominates the economy of the country. The recent economic figures of China show the efforts of the policymakers to reign in the property market with devastating the economic recovery of the country are achieving mixed results. The country’s largest economic activity is the manufacturing sector has been experiencing growth over the last few decades. Currently, the country enjoys attraction and attention from all over the world as the best place of investing renewable energy products (Venkateswaran, 2012, 150). According to the classification of the World Bank, countries with Gross National Income per capita of $9,266 and above qualify to be high-income countries. Hence, the emerging markets like China and shooting to reach such level. Emerging markets are never small and poor. For example, China is an emerging market despite its vast resources and high population. Macroeconomic Indicators Since the commencement of reforms in China in 1978, the country has been experiencing combined rapid growth with moderate stability in the prices of the products. Moreover, the country has experienced improvements in the pace of its economic expansion and periodic expansion. China enjoys efficient and decentralized administration, elastic supply, and quality of labour force, higher levels of fixed capital investments, and the rising volume of savings that has been supplemented in the recent years due to the large flows of direct investments from foreign investors (Madura, 2003, 109). In the past 20 years, China has been experiencing rapid economic growth that stands at about 10%. However, in the first three-quarters of 2012, the economic growth of the country experienced a significant decline, which to some extent made structural production overcapacity more serious. Such circumstances have made it difficult for most businesses to operate. In addition, most consumers and investors have strongly anticipated their pessimism. The Chinese government made a commitment of achieving a real GDP growth of not less than 8% annually to assist in maintaining social stability. Consequently, the country has been remedying the negative macroeconomic shocks associated with slowdown in the export growth and financial crisis in Asian through swift policy responses (Luo, 2002, 166). In the first half of 2013, the economy of China developed towards the intended direction and performed well. Within the same period, other factors that experienced growth include consumption rates, investments, and industrial activities. The country registered a GDP of 17.28 trillion Yuan; consumer price index (CPI) registered 2.6% growth and trade surplus of USD55.3 billion representing USD40.9 billion decline from the same period of last year. Figure 2: Economic performance of China with time In China, the major indicator of its performance at global level is its stable currency against the standard reference currency, the U.S. dollars. This is due to the decision made by the People’s Bank of China to devalue the Yuen. However, the downward pressure remained strong on the currency due to capital outflows, which forced the bank to step in and protect the currency (Norcliffe, 2006, 221). While the country is still expanding faster than any other global economy, several downside risks have emerged in the recent years. In addition, factors such as strong capital outflows, heightened volatility in the stock markets, and overcapacity in some sectors within the economy have the ability to put a dent in the economic growth of the country. Over the long run, the economic status of China might depend on the size of its workforce and the level of productivity. The combination of these two factors determines how much commodities China can supply without necessarily overstretching itself. The urban workforce in the country, which also produces most of the output, has been experiencing reduced growth with age groups forming these workforces shrinking as well (Hont, 2005, 128). Therefore, demographic characteristics also play an important role in determining the investment indicators. On the other hand, little spending on the goods and services often result in the underemployment as most of the investors experience losses due to the unsustainable production process. As a result, most people are laid off. There have been debates on the theoretical and empirical economic circles regarding methods in which the host country’s exports respond to the inward FDI. Most researches indicate that the FDI flows into the country have statistically important and positive effects on the country’s exports. Moreover, the country has been successful in assembling inward FDI. As an attraction from its investment opportunities, sheer size, and ever-growing domestic market, China received approximately 20% of its FDI from the developing countries over the ten years and over $100 billion in 2008. Concerning GDP and investment, FDI contributes about 2.5% of the GDP. FDI policies have been keen on the processes of liberalization (Devinney, Pedersen, & Tihanyi, 2010, 241). Before the market institutions, the country focused on opening foreign investment in the selected coastal areas with much emphasis on attracting export-oriented manufacturing FDI. By 2009, the country’s FDI of services increased three times while that of the manufacturing sector rose by 81%. International Trade and Theories The country has used international trade to bring new equipment and technologies to meet its domestic scarcities. In addition, the country is using exports as means of producing foreign earnings to pay for the imported goods and services. However, the government has resorted to maintaining an even balance of trade to enable the country to pay for its imported products rather than buying on credits (Singh, 2010, 177). With the current population standing at 1.2 billion and the fastest growing economy in the world, most country refers to China as the market of all markets. As a result, it has been able to draw investments from around the globe at such a magnitude that makes it the second largest recipient of foreign capital after the U.S. The total volume of products exported by China is USD232 billion, which include its principal commodities like machinery and equipment, footwear, sporting goods, mineral fuels, toys, and textiles and clothing (Kawai & Prasad, 2011, 97). Of all the products generated from the country, the U.S. imports about 21%, Hong Kong 18%, and Japan 17%. The other export partners include the United Kingdom, the Netherlands, Germany, Singapore, and Taiwan. Over the years, China has been experiencing consistent trade surpluses. The growth of exported products is a major factor that has been supporting the rapid economic growth of the country (Bekaert & Harvey, 2004, 115). In 2013, China overtook the U.S. and became the largest trading nation in the world a factor that it described as a landmark of milestone. In 2014, the annual trade in goods of the country passed the $4 trillion mark for the first time after its exports rose from 7.9% to 2.21 trillion and imports rising as well to $1.95 trillion reflecting 7.3%. In the 1970s, Dunning proposed the renowned eclectic theory of international production and trade off. Eclectic theory integrates various theories like international trade theory, the location theory, and internalization theory. Moreover, the theory explains the FDI decisions. The eclectic theory requires international companies to enjoy advantages associated with ownership and internalization while the host countries should enjoy the geographical advantages. The location factors according to Dunning are the market forces like size and potential, trade barriers, cost factors, and investment climate (Halepete, 2011, 175). Categorically, the location factors of China can be summarized into two main categories. One is the resource conditions, which include natural resources, huge pool of labor, and proximity to the market conditions. With the ever-increasing population, China enjoys a huge pool of human resources required to cushion the development of its emerging market. Other factors contributing the growth of the economy are the favorable environmental factors like political, economic, legal, and infrastructure. These elements play a substantial role in the decision-making process of the FDI. In the 1960s, Raymond Vernon attempted to explain the global trade patterns using the Product Life-Cycle Theory. With the growing demand in China, the demand in the developed where the country exports its products also increases. According to the theory, increment in the demand of China’s products in a foreign market would lead to production of similar goods in the native countries to counter such deficits. On the other hand, the Mercantilist theory emphasizes on the benefits of exporting manufactured products. However, it discourages important from other countries. Upon exportation, the country receives payment using the currency based on the gold standards. According to the theory put forward by Ricardo, the Ricardian Comparative Advantage, for trade to occur between any two countries, they do not have to have necessarily absolute advantage in the commodities that they produce but rather have a comparative advantage. China specializes in the manufacturing sector with high technological products spread all over the world international markets (Alon, 2003, 198). However, other sectors also play important role in ensuring economic development of the country. Focusing on the manufacturing industry would ensure efficient and reliable growth of the emerging market. Figure 3: China's growth trend Most countries achieve economic development owing to the trained workforce, abundant natural resources, and efficient financial systems. The emerging markets often look ahead to create space for investment and laying foundation for sustainable future growth. With the opening of such economies, the GDP levels marked the spots and a defined trickle-down effect, which also opens up new markets for people at the grassroots levels. As a result, there is creation of new middle class and fresh markets required for future investments. Of late, China has been on the global news and not for the best reason due to the declining economic performance. However, with such problems, the country still experiences faster growth than many countries around the globe (Li, Lin, & Liu, 2010, 143). China is the second-largest economy after the U.S. concerning nominal GDP; nonetheless, the country tops the list in terms of purchasing power parity (PPP). As per the Finance Ministry, the country is likely to maintain its 7% economic growth with a solid foundation, growth conditions, and sufficient driving force at disposal. In 2009, the country’s stock markets represented by Shanghai Composite Index (SCI) posted solid returns of about 79.98%. However, the market continued to be in red in the 2010-2011 financial year reflecting a decline of 14.315 and 20.30% respectively. In 2012, China’s economy experienced some recovery at 3.17% with another decline in 2013. The apparent slowdown in the China’s economy is the main reason that accounts for the investors’ focus on the emerging markets, but there are still signs of hope as the country take adequate measures of developing a large and reliable domestic market (Feenstra, 2000, 147). With the country’s focus on the bond market, there are signs that such measures would be the main transmission mechanism for the monetary policies especially with the government’s shift to growth model from an export-led market to domestic demand-led balance. With the establishment ASEAN Free Trade, China is likely to experience increment in population, as most investors tend to seek the era of zero tariffs. Undoubtedly, the emerging market in China is likely to become the largest trading market. Currently, the consumption of developing countries is increasing annually. In China, about 700 million people are farmers reflecting huge potential consumers within its rural markets that even the international business entities need to exploit (Zou & Fu, 2011, 172). With the rapid increment in the purchasing power of the locals, rural consumption rate is likely to increase. As a result, their demand for durable products consumer demands might become the rapid growing market a factor that could attract several international businesses. The trends in the FDI flows are the major indicators of the shifting status to emerging markets. Between 1997 and 2003, companies based in the emerging economies took part in international investments through (mergers & acquisition) M&A deals of $189 billion reflecting 4% of the total value of global M&A investment within the same period. However, such value increased to $1.1 trillion. Foreign investment plays an important role in China’s basic national policy of opening up the market. There are several methods of attracting direct investors including Chinese-foreign joint venture, the Sino-foreign cooperative enterprises, foreign-invested joint-stock companies, and joint development enterprises (Prasad & Ghauri, 2004, 162). In 2009, the China’s economy benefited from the shot and fast heavy stamping four trillion plan of expanding the domestic demand and the double touch regulation initiatives. However, the government had already achieved its target of GDP growth of 8%, which makes the country the third largest global economy. As an emerging economy, there is a huge room for economic development so long as the country seizes the opportunity to accelerate economic restructuring. International trade dates back to the fifteenth when mercantilism theory emerged. The theory is an economic philosophy that aims to enrich the country through restraining imports but encouraging the exports to acquire a favorable balance of trade that would ensure sustainable earning and maintenance of domestic employment (Klug, Young, Bordo, & Schiffman, 2006, 101). Mercantilists advocated for the interventions by the government in all forms with much focus to promote exports through supporting new industries and banning importation by imposing heavy tariffs. With the attracting of international businesses, China as an emerging market should focus on protecting local industries through imposing heavy tariffs to prevent exploitation of the locals. According to the mercantilists, trade is a zero-sum game that only one of the trading partners would gain at some point. References Alon, I. 2003. Chinese culture, organizational behavior, and international business management. Westport, CT: Praeger. Bekaert, G., & Harvey, C. R. 2004. Emerging markets. Cheltenham, UK: Edward Elgar Pub. Devinney, T. M., Pedersen, T., & Tihanyi, L. 2010. The past, present and future of international business & management. Bingley, UK: Emerald. Feenstra, R. C. 2000. The impact of international trade on wages. Chicago: University of Chicago Press. Halepete, J. 2011. 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