The challenges faced within Emerging Markets

This report is going to analysis what exactly an emerging market is. It comprises the definition of emerging market, an overview of the selected country, characteristics and challenges of emerging market in relation to the selected country, trade, investment and migration, ideological factors, political factor and economic factor, the environment of selected country and the world.

Definition of Emerging Market

The concept of emerging economies is relatively new, and most Western managers look at these economies only as large, untapped markets. The reality is that countries with emerging economies are also becoming competitors and sourcing locations for Western nations. But it is important to realize that all developing countries cannot be characterized as emerging economies. Only those that have started an economic reform process aimed at alleviating problems, for instance, of poverty, poor infrastructure, and overpopulation, and achieved a steady growth in gross national product(GNP) per capita may truly be called emerging economies. These economies will play an increasing role and international business over the next decades, which in turn will also foster regional and global political changes.

Overview of China

China is selected in relation to the analysis as an emerging market. Historically, China has experienced three failures of reformation in Qing’s Dynasty. Either one showing that China has always been a conservative country, a gleam of hope coming in the 1970s after the family-planning law was strictly enacted. No matter in population or economic growth rate has scored an enormous improvement.

Also, the entering of World Trade Organization (WTO) reshaped its economic outlook. The continuous Door-opening policy of China not only enhanced the transparence but also liberalized the image of China.

Under the led of Deng Xiaoping, China was still unable to get rid of those conservative clouds and explicitly soaring in the democratic sky.

After such a long period, the harvest of China’s modernization woke the world up recently that China is powerful enough to affect the global economy.

Characteristics and Challenges of emerging market in relation to China

Emerging economies are classified into relatively homogeneous groups on the basis of demographic and economic commonalties. The ability of many emerging economies to engage in international business is frequently constrained by how much they owe to other nations. Useful information on indebtedness, according to four risk groups based on a country’s debt service requirements. These risk classifications influence a country’s ability to borrow from international banks.

Some macroeconomic characteristics of emerging economies are relevant to successful marketing. Most emerging economies are being liberalized, although many are still far from becoming market economies.

Besides, the risks of emerging economies are divided into three dimensions included lack of infrastructure, environmental issue and ethical issues. All of these dimensions are listed below:

Lack of Infrastructure

In fact, many emerging countries have well-established local distribution systems like India and Malaysia. China and Russia perhaps are the only two countries that lack of fully developed distribution system.

Environmental Issues

Western firms are used to competing on price, quality dimensions, but there are one more new dimension called the environmental or social responsibility. As the situation is changing fast, western firms should be aware when doing business in emerging markets.

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Firstly, sustainability is the key issue in which striving to balance economic growth with environmental management is very critical nowadays. Besides, poverty can only be eliminated without destroying the environment. Furthermore, environmental regulation is necessarily enacted in a stringent way.

Ethical Issues

Undoubtedly, unethical, bribery and corruption are a reality in many emerging economies in case when doing business.

It is noticed that the perception of bribery is culturally relative and socially conditioned. In many cultures, gifts and payments are necessary parts of building relationships, and the line between a bribe and a gift can be blurred. (Cavusgil, S. Tamer, 2002).

Economy of China

East Asia is the fastest-growing region n the world over the past quarter of a century, although the East Asian currency crisis of 1997-98. China is the fastest growing country in East Asia, approximately 9.4%p.a. since beginning of economic reform in 1978.

Firstly, between 1978 and 2004, Chinese real GDP grew from $160 billion to $1.65 trillion (2004 prices) (6th largest GDP in the world) and real GDP per capita grew from $168 to $1.275. Despite its rapid growth, China is still a developing economy in terms of its real GDP per capita.

Secondly, it is one of the very few socialist countries that have made a successful transition from a centrally planned to a market economy. The 11th Five-Year Plan is only indicative and not mandatory; the rate of interest and the exchange rate are the only prices that are still administratively determined on the margin.

Thirdly, the private sector accounts for more than 70% of GDP and an even greater percentage of employment in 2004 compared to essentially 0% in 1978. The distribution of GDP by the originating sector has become Primary, 15%; Secondary, 53% and Tertiary, 32%.

Fourthly, China is no longer a “shortage” economy but an insufficient aggregate demand is a real possibility. It has become the “World’s Factory”, the major supplier of inexpensive light manufactured goods such as textiles, apparel, shoes, electrical and electronic appliances, furniture, etc., on the basis of its low real wage rate.

Fifthly, it is the world’s major user and importer of oil, minerals, and other natural resources and primary raw materials

Sixthly, it has also become the world’s fastest-growing market for consumer goods such as automobiles, cell phones, and tourism services, and producer goods such as aircrafts, computers, and steel (Economy of China, 2005).

Trade, Investment and Migration

Chinese international trade has been growing at double-digit rates in recent years, more than twice the rate of growth of world trade as a whole and is expected to continue to do so in the future. Total Chinese exports and imports of goods and services amounted to US$1.29 trillion in 2004, making China the third largest trading nation in the world, after United States and Germany.

In 2004, exports of goods alone grew 35.4% to $593.4 billion while imports grew 24% to $561.4 billion; resulting in a trade surplus in goods of $32 billion, or less than 3% of total trade in goods. Besides, taking goods and services together, China had a trade surplus of $22.4 billion in 2004, or less than 2% of total trade in goods and services.

Chinese exports are still characterized by a relatively low domestic value-added content, estimated to be 30% for all exports and 20% for exports to the U.S. Thus a 10% revaluation of the Renminbi will result in only a 2% increase in the cost of Chinese exports to the U.S. in U.S. $ terms, and a very limited impact on the volume of trade.

More than 50% of Chinese international trade is foreign-direct-investment (FDI)-led, i.e., conducted by “foreign-invested enterprises”. More than 50% of Chinese international trade consists of intra-company trade.

A large percentage of Chinese international trade consists of trade in raw materials, “intermediate inputs,” “semi-finished goods” and “services” rather than finished “products”. China is often the last link of the global supply chain- thus; it has trade deficits with almost every economy in East Asia but large trade surpluses vis-à-vis the U.S. (Economy of China, 2005).

The Macroeconomic Situation

The Chinese economy showed signs of over heating in selected sectors and regions in 2004. The rate of growth of real GDP for 2004 was a high 9.5%. The rate of inflation, as measured by the consumer price index (CPI) may be estimated to be 3.9% for the same period, the highest rate since the mid-1990s.

Efforts to engineer a soft landing has met with some success the rate of increase of prices of certain manufactured products such as cement and steel, the rate of growth of fixed investment.

Investment

China is now the second most popular destination country for foreign direct investment (FDI) after the United States, with a total of US$60 billion in 2004, compared to US$96 billion for the U.S. However, FDI into China is less than 10% of the total FDO worldwide.

At US$60 billion, it amounts to less than 10% of the annual Chinese aggregate gross domestic investment of approximately US$680 billion. Also, most of it is know as recycled or round-tripped investment ultimately originated by Chinese entities and individuals. In fact, FDI is not crucial to the Chinese economy. Because of the FDI, advanced technology, know-how, business methods and management techniques were brought to China. (Economy of China, 2005)

Challenge of China

Chinese economic reform has been most successful. However, there are still many problems ahead.

First of all, there is a low level of household consumption.

Secondly, the prevalence of duplicative and wasteful investment in which resulted a waste and misallocation of resources.

Thirdly, the inadequate provision of social services like hospital causes a poor livelihood.

Fourthly, the rising income inequality will result a discrepancy between the rich and the poor

Fifthly, the corruption between governors and businessman is very crucial in doing business. It directly affects the quality of any kind of investment.

Sixthly, the environmental degradation as the concern of environmental issue and people’s consciousness is not enough.

Seventhly, the potential for macroeconomic instability posed by the financial sector

Eighthly, the local protectionism resists against the foreign goods.

Finally, the stability of the exchange rate is not as same as Hong Kong linked with U.S.A. But the problem is getting better as China currency is higher than Hong Kong currently.

There are also some challenges of a typical emerging market based on the different macro-environmental factors, which will be mentioned below.

Economic Factors

Economically, all the countries in the world are suffering serious economic problems. For example, after the exposure of the sub prime mortgage crises, the United State is now grappling with the core of the financial tsunami. Europe is seeking for a coherent policy response. In Asia, is striving for the balanced growth from external to domestic.

Besides, according to the World Economic Outlook 2009 of the International Monetary Fund, China is anticipated to increase 9.3% approximately in the economic growth in 2009 (International Monetary Fund,2009). Also, with reference to the “mid-2010 World Economic Situation and Forecast” of the United Nations, China is leading the way among developing countries. Led by strong growth in China, regional GDP is expected to increase by 7.3 per cent in 2010, up from 4.7 per cent in 2009. China will again be the region’s fastest-growing economy in 2010 and 2011 with GDP estimated to rise by 9.2 per cent and 8.8 per cent, respectively (United Nations, 2010).

The entire economic system is likely to be changed towards China. By the way, the CEO of the HSBC (CHINA), Richard Yorke has been asked why the HSBC persevered in China; Yorke said “We’ve always felt very comfortable about the long-term development of our businesses here.” Also, he said that “With the economic reforms, there have been greater opportunities for foreign and domestic banks to participate in growth.” It is known that China promptly woke up from the tsunami and the depth of the financial system is further consolidated by the confidence of the continuing investment (Xinhua News, 2009).

Political Factors

Politically, the statuses of the world’s countries have been changed after the financial tsunami. The great power like U.S.A which is the former dominating power in the world is declining. The new order is drastically migrated from West to East where the China is. It was truly reflected on several months after the inauguration of the President of the United State of America, Barrack Obama. It was traced back that the Secretary of the State, Hillary Clinton, who has planned an Asian tour particularly on negotiating international economic issues with China. “I certainly do think that the Chinese government and central bank are making a smart decision by continuing to invest in treasury bonds.” Hillary said during the meeting in China (China digital times, 2009). Such an action mirrored the declining economic crisis of America and seeking help from China. In other words, the diplomacy of the greatest country in the world also focused in coordinating with China in order to prevent the economic depression.

Social Factors

Sociologically, China’s population is somehow slowed down since 1979 when Deng proclaimed the one child policy. However, the aging problem is instantly happened nowadays. Chinese government should have a coherent method in maintaining birth rate and at the same time reducing the aging problem (One Child Policy, 2010).

Technological Factors

Technologically, China is getting more liberal since the join of the World Trade Organization (WTO). More and more foreign investments, several state-owned companies are being sold, including banking telecommunication industry. All these provided a better quality on infrastructure and environment.

Ideological Factors

China has always been a socialism country under Marxism. Marxism is an economic and social system based upon the political and economic theories of Karl Marx and Friedrich Engels. It is “a theory in which class struggle is a central element in the analysis of social change in Western societies”. Marxism is the antithesis of capitalism which is defined as “an economic system based on the private ownership of the means of production a distribution of goods, characterized by a free competitive market and motivation by profit. Marxism is the system of socialism of which the dominant feature is public ownership of the means of production, distribution, and exchange.

Exploitation

Under Marxism, a person is exploited if they perform more labour than is necessary to produce the goods they consume. A person is an exploiter if they perform less labour than is necessary to produce the goods they consume. Also, exploitation of capitalism is regarded as a form of the capitalist pumping surplus value out of the worker.

However, after the appointment of Hu and Wei, China is getting more open than before and escalating on the ladder of capitalism. The entry of WTO, host of Olympic game all these showing a hand-shaking of openness. China is regarded as the most successful country in which turning socialism into capitalism (Karl Marx, 2010).

Conclusion

Undoubtedly, China is an optimal emerging market in the world. Yet there are still some problem mentioned above in which need to be improved in order to provide a better hardware support and stronger confidence to the investors.