Emerging Market Economies and Risk Factors - Essay Example

Emerging Market Economies and Risk Factors By (Name) The Name of the class: Professor: The Name of the School: The Date: Emerging Market Economies Economic globalization has proven to be the most critical challenge that affects many corporations in the world today. The management teams and chief executive officers of multinational companies acknowledge that they are influenced by the similar challenge. Moreover, it has also been difficult for them to establish or determine the strategies that promote international business across various countries. Today, the concept of emerging market economies is associated with countries that are developed. Economic globalization through the emerging market economies has been used to break down the trade or business barriers (Zou & Fu, 2011). The principle of emerging market is used in defining the economic status of a nation. An emerging market is defined as a type of economy that is undergoing economic transformation and rapid growth and development. Also, this type of economy provides lucrative opportunities for organizations to engage in business investments that may be medium or long-term. Emerging market economies have various characteristics. Some of the characteristics include economic transformations and rapid growth, they are associated with greater levels of risk and are less predictable, they have strong demands from the middle classes among many other characteristics (Kolodko, 2017). This paper explains the reasons why today, many companies are choosing to create operational strategies in emerging markets. Secondly, it provides detailed descriptions explaining the risks that face multinational enterprises in making investment decisions in an emerging market. Reasons why companies choose the strategy Emerging markets play vital roles to many business companies, and it is on this basis that many corporations including the upcoming ones have redirected their operations towards emerging markets. Emerging markets redirect companies towards achieving and sustaining business growth. Also, through maintaining the growth of a company, emerging markets do offer greater opportunities for capital gains than the income opportunities. Thus, many companies desire to invest in many capital gains which provide a competitive advantage in the business market environment. Through the generation of more capital, a company has the economical capabilities to expand the scope of its business activities. The emerging markets do carry high risks of enhancing the average investments of a company. Consequently, rapid economic growth is achieved by an organization. Therefore, emerging markets is a source of higher return potentials in a company (Aizenman, Jinjarak & Park, 2016). Emerging markets have the ability to undergo expansion, and this growth may extend to enhanced corporate profitability and makes a company to gain further investments. Furthermore, with increased investments, an organization would want to involve the similar strategies in an enhanced manner to ensure that they gain more profits and a competitive advantage in the economic market environment. Companies choose the strategies of emerging market economies because they bring an in-depth understanding of the market structure of economies that are emerging. Understanding both the local, regional and international market structure helps an organization to plan effectively on the ways through which it can develop competitive strategies for an effective delivery of its products and services. Emerging markets are composed of structures that operate in a different manner as compared to the developed economies. Understanding the market structure is useful to an organization because it provides the basis or the foundation of the plans and activities of a company on how it intends to achieve its goals and objectives (Cavusgil, 2008). Companies get to acquire the information about their customers. Again, knowing the market structure enables companies to synthesize various mechanisms that can be used to advertise their products and services (Manktelow et.al, 2016). Above all corporations can learn on how labor markets operate to enhance the different business strategies and plans created by companies. Enterprises have redirected their efforts to conducting operations in emerging markets because emerging markets have the stability of employment. Efforts to grow jobs in various nations are boosted or accelerated by the role played by emerging market. Emerging markets have jobs that cannot be exhausted as compared to the developed economies (Manktelow et.al, 2016). Emerging markets have the potential to leverage many job opportunities to people. In connection to this, companies can achieve success and a competitive advantage with increased job opportunities that are offered by the emerging markets. Therefore, companies would want to conduct many of their activities in emerging markets because of their ability to deliver stability of employment opportunities to many people in an organization. The other consideration by companies is the growth for themselves. Emerging markets aid in the provision of more opportunities for growth than in developed economy (Kohli, 2009). The growth in developing or emerging economies is higher than those in already developed economies. The pace of growth in emerging markets accounts for high percentages of the global growth. It implies that with the adoption of strategies of emerging markets, companies will realize high rates of organizational growth, making them more successful and achieving high levels of competition. Next reason is that emerging economies have the power to control companies. Companies feel more powerful in emerging economies as compared to the developed economies. The reasons for the higher power to control include the size of emerging economies being smaller, thus attracting higher span of control (Kvint, 2009). The second reason is that emerging economies do not have stringent laws as compared to those of developed economies. Companies gain the power to control. Hence they also gain a competitive power in the business market (Kolodko, 2017). The other reason why companies are extending more operations to emerging economies is that they have the opportunities to innovate. Every company requires improved innovation skills to achieve organizational success. With improved innovations in the company, the scope of the provision of the organizational services is improved regarding their quality. Through innovation, companies can increase the demand for new products and services (Manktelow et.al, 2016). Therefore, the overall performance of an organization is increased. Again, organizations would want to engage in emerging economies because it gives them an opportunity to be counted as one of the members of the global middle class. Emerging economies provide new and enhanced opportunities in the company. It can be deduced that emerging economies are progressive in nature and undergo development. Regarding this, companies are also obligated to lay down those strategies that will direct them towards the realization of a better change. Companies are shifting their interests towards emerging markets because of its demographic relevance. It is in the interest of every company to establish its services to a larger group of people in the entire glob al markets. Besides, this objective is not always easy to be achieved by various organizations. Regarding demographic functions, emerging markets can cover vast areas in economic markets (Zou & Fu, 2011). This is achieved through the use of enhanced technological ways of delivering business services. Emerging markets are on the rise in every economic market in the global society. It is because of this that many companies are diverting their operations towards the use of emerging markets, mainly for the purpose of wanting to extend their business services to cover large areas in the global sector. Furthermore, the extension of services to cover large areas results in delivery of many services to a majority of consumers in the global economic markets (Kvint, 2009). As a result of the extension of business services to cover large areas, a company achieves increased profitability and a competitive advantage over companies that provide services in localized regions or are located within already developed economies that do not provide further business opportunities to a company. Risks facing MNE in deciding to invest in an emerging market Emerging markets are significant in providing new investment opportunities, for example, increased economic growths, diversification benefits and increased expected returns to a company. However, there are some risks that are associated with the investments in an emerging market (Aizenman, Jinjarak & Park, 2016). MNEs (Multinational Enterprises) refer to business corporations that deliver business operations in many countries. A company is not considered to be multinational unless it has foreign investments in many other countries. Arellano (2008) argues that although MNEs have many good chances of doing operations in economic markets, they may be faced with various factors of risks that may affect their decisions in making investments in emerging markets. The first risk that may be faced by multinational enterprises is the risk associated with foreign exchange. Multinational corporations serve various countries that involve the use of different foreign currencies within the emerging markets. Foreign investments may be produced in local currencies (Arellano, 2008). Regarding this, multinational companies must convert the local currencies into foreign currencies so that business operations can be carried out in a smooth manner. For instance, an American-based company that intends to operate n Brazil by purchasing the stocks of Brazil must do that using the Brazilian currency. Therefore, the fluctuation in foreign currencies is a risk factor that results in great impacts on the total return of investments of multinational enterprises (Aizenman, Jinjarak & Park, 2016). In some incidences, the rates of exchange of foreign currencies may have a wide gap that does not match or meet the costs of goods of multinational corporations. Therefore, the companies are exposed to higher risks of experiencing sudden losses that hinder the progress of the companies. Multinational companies are at higher risks of experiencing net loss regarding its total returns when selling and converting back the foreign currencies (Arellano, 2008). These companies must acquire the basis information about foreign exchange currencies before choosing to make decisions of making investments in emerging markets. The second risk the less liquidity state of the emerging markets. Emerging markets are known to have a less liquid state than the developed economies. Being less liquid is a market imperfection that multinational companies should understand before making a go-ahead to carry out investments in emerging markets (Arellano, 2008). The less liquid state creates risks of increasing the level of uncertainties in prices and enhances higher broker fees in multinational corporations (Aizenman, Jinjarak & Park, 2016). The multinational companies that provide their products and services in a less liquid market may face higher and substantial risks that the services and their products may not be successful using the current prices. In addition, any business transactions that are made may pass through business levels that are unfavorable. Additionally, brokers within the emerging markets may as well create higher charges in market prices and commissions (Aizenman, Jinjarak & Park, 2016). This may be done with the intentions of raising efforts to expand the business opportunities in the emerging markets. When multinational companies make the decision of operating in the illiquid markets, they are increasing their risks of operating in an environment that prevent them from the realization of fast transactions in the markets that may provide more benefits for the growth and development of the companies. This risk hinders multinational companies from undergoing through increased developments across various business markets. Poor corporate governance system is another risk factor associated with emerging markets. For multinational corporations to achieve positive stock returns in their business, they should have a solid structure or system of corporate governance. Emerging markets may at times have corporate governance systems that are weaker (Aizenman, Jinjarak & Park, 2016). It means that management bodies or the government may take control of the governance of emerging markets. When this happens, multinational companies are put at higher risks because some of them may be uncomfortable operating under the strict governance of governmental bodies or other business agencies. Therefore, the job security of various companies may be compromised, putting corporations at higher risks. The weak corporate governance system of emerging markets may hinder multinational enterprises from delivering effective services in the business markets. Some companies would function well in the business market through having a strong and effective governing body (Arellano, 2008). Lack of strong governing policies hinders the corporations from an effective delivery of its services. Therefore, being that emerging markets have weaker corporate governance system puts multinational corporations at increased risks, thus not being able to achieve their collective goals and objectives. Multinational companies may face political risks in the process of trying to deliver services and products in emerging markets. Political risks involve the uncertainties experienced in making of advanced political decisions. The priorities of emerging markets are often based on demand. On the other hand, developed economies are guided by the principles of a free market (Aizenman, Jinjarak & Park, 2016). Many factors lead to the political risks that affect emerging markets. Some of these factors include the increase in taxes, changes in the marketing policies, possibilities of war among nations, loss of subsidy, laws of extraction of resources, and the inability to find control measures to curb inflation in different countries (Arellano, 2008). Political instabilities may result in civil wars that may weaken the growth of emerging markets. The risks of political instabilities may cause a shutdown of multinational companies. Multinational companies should put into considerations some of the political risks before making further decisions to engage in the operations of the emerging markets. Political risks may also cause further problems in the overall management of multinational companies, making them ineffective in the delivery of their services across various nations with different market economies (Arellano, 2008). The other risk that is likely to affect multinational companies in making decisions to invest in emerging markets is the increased chances involving bankruptcy. The risks of bankruptcy are a common phenomenon in every type of economy (Arellano, 2008). However, these risks are prevalent mostly in economies that exist outside the developed world. Through emerging markets, companies may provide a false impression about profitability. This may result in serious complications for an organization. Consequently, a multinational corporation may face a sudden drop in its value when it is exposed on giving a false picture of profitability (Aizenman, Jinjarak & Park, 2016). Regarding profitability, emerging markets are considered as being highly risky. Therefore, multinational companies with intentions of investing in emerging markets are at higher risks of increased chances of bankruptcy. Once a company faces the risks, it must issue some bonds that bring in higher rates of interest. As a result, the company may experience increased burden of debts and increased costs of borrowing hence strengthening the company's potential of attaining high levels of bankruptcy (Aizenman, Jinjarak & Park, 2016). The implication is that through investing in emerging markets, multinational enterprises are at higher risks of facing financial challenges. In brief, most companies are progressively moving towards establishing operations with emerging markets. Also, emerging markets are increasing their divergence and offer greater potentials that are worth consideration by multinational corporations. An emerging market economy describes an economy of a nation that is characterized by rapid growth and developments. One of the main characteristics of emerging market economy is that they have a rapid development. Companies choose to operate within emerging markets because of various reasons such as the quest to understand market structures, establishing stable employment opportunities, the provision of the power of control among many other factors. Despite the emerging markets remaining to be vigorous and promising, they are associated with various risks factors as described above. Finally, the bottom line is that investments in emerging markets may produce substantial returns to multinational enterprises. However, the companies should be aware that the risks must be judged based on the risk factors within the framework of emerging markets. References AIZENMAN, J., JINJARAK, Y. AND PARK, D., 2016. Fundamentals and sovereign risk of emerging markets. Pacific Economic Review, 21(2), pp.151-177. ARELLANO, C., 2008. Default risk and income fluctuations in emerging economies. The American Economic Review, 98(3), pp.690-712. CAVUSGIL, TAMER. (2008). International business: strategy, management, and the new realities. Pearson Prentice Hall. KOHLI, H. S. (2009). Growth and development in emerging market economies international private capital flows, financial markets and globalization. Los Angeles, SAGE. KOLODKO, GRZEGORZ W. (2017). Emerging Market Economies Globalization and Development. Routledge. Kvint, Vladimir (2009). The Global Emerging Market: Strategic Management and Economics. New York, London: Routledge. MANKTELOW, AIDAN, WALLIN, FRIDA, & MEADOWS, MARK. (2016). Emerging Markets. Audible Studios on Brilliance audio. ZOU, S., & FU, H. (2011). International Marketing: Emerging Markets. Bradford, Emerald Group Pub. 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