Types of Growth Opportunity in Emerging Markets - dummies

Types of Growth Opportunity in Emerging Markets

By Ann C. Logue

Emerging and frontier markets have opportunities for growth that often aren’t available in more developed economies. These come from three main sources: new, pervasive technologies; the improved spending power of a growing middle class; and gains from greater trading activity with other countries. When you look at investments, you want to look at how these changes create growth opportunities.

Leapfrogging technologies

In a developed economy, incredible investments in technology are in place and are fixed. However, one of the greatest opportunities in emerging markets is to be on the ground floor of companies that are working on technologies that aren’t yet economically feasible for big multinational corporations to try:

  • Markets for machinery: Products manufactured in emerging markets often are smaller and more basic than the products in developed economies. They may seem like a step backward to people in developed countries, but they can be vital to making life better for those living in less-developed countries.

  • Computer and software technology: Companies have taken advantage of the high education rate and low cost of living in emerging markets. Customers for emerging-market high-technology services are usually in developed countries, but lesser-developed countries needing technological assistance turn to their emerging-market brethren for more affordable expertise.

Growing the middle class

To a certain extent, an emerging market is really a market where a middle class is emerging. As jobs and opportunities are created, more people move out of poverty and into a comfortable middle zone where they can afford some luxuries that were previously unimaginable. They go out and spend their money, creating more economic activity.

The middle class isn’t the only beneficiary. As a country’s economy improves, the poorest people tend to become less poor, and even they have more money to spend. Even a small improvement in income represents a huge increase in purchasing power. Yes, the money goes to subsistence needs, especially food, but even that spending power represents an improvement in an economy and in the health of the people.

Better trade opportunities

Trade benefits both the importer and the exporter. It lets people capitalize on their skills. If they’re good at making something, they can keep doing that even if they make more of a good than people at home can use. And if they need something, they can buy it from those who produce it, wherever they are.

Finding a comparative advantage

A reality of emerging markets is that they don’t produce all goods as efficiently as people do in developed markets. It may take more time to complete a product, and some of the output may have to be rejected. But because wages are low, the value of the acceptable goods produced per dollar spent on wages is often higher.

If a nation’s businesses can produce something at a lower cost than it can be produced elsewhere, even after adjusting for extra time and higher error rates, the country is going to benefit from trade. And that’s where emerging markets find their niches.

Free trade

If trade is restricted, it’s harder to get people the goods and services they need most at the most efficient price. That’s why a key focus in the world is free trade — trade between nations free of quotas and tariffs. In addition to tariffs, governments sometimes protect local industries through regulation.

Because trade moves better when it’s free of restrictions, 153 nations have joined the World Trade Organization, which negotiates the rules of trade among nations and settles disputes as they arise.

Free trade can be controversial because some people lose when they have to compete with imported goods. However, free trade is good for people overall, and a commitment to free trade can also help emerging markets grow faster.

Fair trade

Some people have greater access to the market than others, either because of their technological sophistication and business acumen or because of the infrastructure of the country where they operate — or both. Fair trade is a movement to give producers of agricultural products and handicrafts in developing nations some of the advantages of their competitors in developed countries in order to make the terms of trade equal. Some international federations are trying to improve markets and to create branding that would attract buyers in developed countries.