International Business in the Emerging Markets - Essay Example

FDI trends in Asia and Latin America since the 1970s. FDI “stands for Foreign Direct Investment, a component of a country's national financial accounts. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations. It does not include foreign investment into the stock markets.” “From 1970 to 1998, FDI flows fluctuated up and down in the1970s and 1980s with no distinct tendency to rise. In the 1990s, however, FDI exploded, when between 1990 and 1998 the net annual inflow of FDI into developing countries rose from US$ 30.5 billion to US$ 163 billion in constant (1998) dollars. The magnitude of this flow of capital is momentous, and although there are well-defined reasons for this trend it has caught many by surprise.” The increase in FDI investment has mostly been in East Asia and the Pacific, Latin America and the Caribbean, regions of Europe, and Central Asia. This means Africa and other parts of the world did not receive much in terms of FDI. The effect this has on the poorer nation is that it keeps their currency low and the amount of available jobs are low as well as the economy being flat. The effect on the countries that receive investments are a higher foreign exchange reserve, more jobs, and a higher GDP. (2) China’s energy policy and its impact on developing countries in Africa and Asia. China is now the greatest energy consuming country in the world, surpassing the US based on the IEA (International Energy Agency) findings. Although Chinese officials dispute that the country is responsible for 2.25 billion tons of energy consumption, the country did admit to stockpiling oil when there is a lull in purchasing. China is also the leading gas emitter so it makes sense that China would be the largest consumer of energy. Also China spends the most amount of money on green technology. China has such a desire to dominate the oil market that is has gone against sanctions in order to invest in Iran. This means that not only are the Chinese going against what the world is trying to accomplish but also are strengthening the Iranian mindset of misinformation. Due to the fact that Chinese officials focus on controlling demand of gas by emphasizing price impacts the developing countries like Africa and Asia because the prices in these two countries are much higher than what would be in China. Why? Well first of all purchasing from Iran would lower prices but also being a major buyer in the market can allow for more pressure on the market. In Africa there is little pressure on the market for energy and Asia outside of China's consumption has a much lower energy demand. By cornering the market with the U.S, China is essentially decreasing the likelihood that Asia and Africa will ever be able to afford the energy costs. Even if these countries can afford it, are the citizens willing to pay for this consistently, or will they tire of high energy prices? The effect on Africa and some parts of Asia will be a lack of the supply of energy and therefore power outages, inability to drive cars, and issues of this nature. As a NY Times article states: “Power blackouts — “load shedding,” in utility jargon — are hardly novel in sub-Saharan Africa, where many electricity grids remain chewing-gum-and-baling-wire affairs. Even so, this year is different. Perhaps 25 of the 44 sub-Saharan nations face crippling electricity shortages, a power crisis that some experts call unprecedented. The causes are manifold: strong economic growth in some places, economic collapse in others, war, poor planning, population booms, high oil prices and drought have combined to leave both industry and residents short of power when many need it most.” These outages can be crippling for small businesses such as farms, and production companies. Factories would have to build another day and the company loses because they are unable to meet their obligations. (3) The drivers of globalization amid the current financial crisis. Before we can talk about globalization we must know what the word means. Globalization is “the development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor markets.” The drivers for globalization amid the current financial crisis involve costs, currency risk, new middle class, portfolio concentration, and a shift in money, buying power and foreign exchange reserves. Industrialized countries have been projected to earn an average growth rate of 2.3% while emerging economies will earn a growth rate of 4.7% until 2025. This means that a large amount of the global economy will be based in the emerging markets. Due to this growth rate these developing countries also China has $3 trillion in US for the largest share of global reserves by an emerging market. The foreign exchange reserves will be diversified as the dollar, euro and renminbi would be an equal share of the reserves. Due to the growing debt in the US, the company is not likely to experience substantial growth in the near future. (4) Emerging markets and free trade /WTO. “The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to help producers of goods and services, exporters, and importers conduct their business.” The emerging markets of China, and India among others have experienced great growth rates and continue to export increasingly high amounts of products to industrialized counties. The way in which these products arrive is of great concern to the buying nation. Two countries may make an agreement that certain products must come from a specific source but the WTO can overrule some bans. For instance the WTO overturned these bans: “The United States’ attempt to ban shrimp caught using apparatus that were harmful to endangered sea turtles has been ruled as WTO-illegal, forcing the US to reverse its decision.” “Guatemala took efforts to help reduce infant mortality, in accordance with the World Health Organization’s guidelines, and to counter aggressive marketing by baby food companies aimed at convincing mothers their products are superior to the more nutritious and disease-protecting breast milk for their babies. The result? The affected corporations managed to take this to GATT (the predecessor to the WTO) and get a reversal of the law amidst the threat of sanctions. Profits prevailed.” This shows the power of the WTO but the issue sometimes for this organization is not that it has power but that it fails to use this power effectively for free trade. “During the week of May 20, 1998, celebrations marked 50 years of multilateral trade. However, as the following link mentions, the African nations did not feel that there was much to rejoice at and said that it was a party where only the rich nations has something to celebrate.” Africa and poorer countries need to have a mouthpiece but lack that in the WTO. (5) The impact of the aging of the population in emerging markets on economic growth. Due to vast increase of the older population the time has come for the workers to receive pension and various other benefits that they have qualified for. However in this day and age the government and private companies will not be able to meet the aforementioned benefits and in fact the employees will have to work much longer for these benefits. Governments have already proposed increased pension taxes, and pension rollbacks among other things. These benefits are being slashed not just for current employees but future employees. This is in the country's best interest, to avoid being unable to pay the employee. The other issue is that the younger population is decreasing as people have less children. The trend in Europe and Japan is that “by 2025 the number of people aged 15 to 64 is projected to dwindle by 10.4% in Spain, 10.7% in Germany, 14.8% in Italy, and 15.7% in Japan” while people are becoming older and older due to longer lifespans and declining fertility. Once the older generations begin retirement the pension of each individual must be well maintained, otherwise retired seniors would have to go back into the workforce or they would have need government support. One of the solutions that companies have used is to increase the age of retirement so that benefits only kick in after 60 instead of 50 allowing for part time work. This reduction helps seniors make a living no matter how modest. In Europe pension benefits are covered by the government and “in much of Europe up to 90% of workers rely almost entirely on public pensions. Benefits also are generous. Austria guarantees 93% of pay at retirement, for example, and Spain offers 94.7%. Without radical change, pensions and elder-care costs will jump from 14% of industrial nations' gross domestic product to 18% in 35 years, warns Washington's Center for Strategic & International Studies.” Essentially in Japan the old age population will go from 17 out of 100 to 30 out of 100 and their workforce productivity will decrease by 1% each year. There will not likely be a way of avoiding this in the future. (6) The causes of the Latin American debt crisis in the 1980s and lessons learned by governments in Latin America. OPEC (Organizations of Petroleum Exporting Countries), after making a large amount of money through oil, deposited its money with commercial banks and these banks were eager to give loans and poorer countries quickly signed off on these low current interest but floating interest rate loans. The governments quickly spent it all and then had no money to repay the loans. Countries such as Mexico, Brazil, and Argentina had received loans under inflationary circumstances and during the recession when the Federal Reserve tightened money supply the interest rates increased. With the increase in interest rates there was a decrease in trade and therefore the developing countries slowly became unable to pay the higher interest charges due to the lack of foreign currency. Mexico was the first to default and begin the debt crisis. Due to the lack of exports and high interest rates the foreign exchange reserve was depleted and private individuals and entities began to withdraw capital from the developing countries, likely due to the currency of the country being dangerously close to being devalued. The IMF and World Bank engaged with the commercial banks worldwide on a case-by-case basis and was able to cause a deferred payment and provision for new loans. In exchange of the new loans the developing countries were required by these entities to spend less, devalue the nations currency, and enforce strict limits on subsides among other things. Due to continuous restructuring of the loans the commercial banks wondered about the developing countries being unable to pay and a plan, Baker plan, in 1985 was presented to alleviate the debt by lending more money and demanding privatization of government owned entities as well as deregulation of the economy. This plan failed because of a lack of funding and the loans that were given increased the problems. The commercial banks were beginning to concede that the loans would never be paid. Then the Brady initiative in March 1989 was announced and the lending was restricted while the developing countries had to offer discount, par, and interest rate reduction bonds. The government continuously borrowed with no end in sight due to the prior borrowing but the government has learned not to frivolously borrow for consumption purposes but rather to pay debt. The debt has caused the government to restrict spending and reduce other programs. This after the amount of debt rose to $600 billion from $450 billion. 7. The growth strategies of China and India amid the current financial crisis. China During the financial crisis China discontinued the increase in the minimum wage that went up to $146 per month to decrease the strain on employers who were having trouble receiving payment for their goods that were already shipped. The Chinese officials also called for more lending to small and medium sized companies. These steps were taken in order to stabilize the economy in China and continue on the normal growth path instead of allowing the growth rate to decrease which would have happened if the costs to do business increased but revenue decreased. China's growth strategy during the current recessional period has been one of government spending. China has been engaging in numerous projects to build railways, subways, expressways, airports, airports and other infrastructure. The desired effect of this spending is to increase construction jobs, and increase the price of raw materials but China does not seem to have a long term plan on how to have continuous growth. In 2010 China's growth rate was 10.3% and was above the 8% target. On fears of inflation Chinese officials decided to increase interest rates and placed restrictions on property transactions. This tactics, Chinese officials hope, will help bring the growth rate to a 7% increase. India In India the government has become more aggressive in exporting to encourage growth and has changed from a domestic consumption reliance. The Reserve Bank of India (RBI) has been tighter with monetary policy and because of a higher growth rate has increased the interest rate multiple times. Even with the interest rate increase it is expected that the inflation will persist currently but will subside in the near future. The government is now seeking to trade bilaterally in order to open up trade markets for India. To accomplish this India expects a large increase in the exports of merchandise due to “preferential” trade agreements. There is more focus on production and engineering services rather than agriculture as an export. India has transformed into a more industrialized country and its competitive advantage going forward is likely to be within production. (8) The economic development of Brazil and Mexico since the 1970s. Brazil Brazilian policy is one of preventing inflationary periods by using monetary correction, or in other words the restating of real estate, debts in arrears, and legal revaluation of fixed assets. In the 2nd development plan Brazil intended to increase the economy in general and to cause an expansion in “agriculture, mineral exploitation, and hydroelectric power in the region”. The 3rd development plan consisted again of primarily agriculture being the main part of the plan. The First National plan of the New Republic was about reducing poverty and introducing fiscal reform. After inflation occurred the Cruzado plan was enacted. This plan froze wages and prices but after awhile overspending occurred as buyers took advantage of prices thus causing inflation. The real plan came into affect as the new currency and initially was a success until inflation cause a devaluation of the currency. Mexico Mexico had net imports of oil in the early 1970's due to increased production in the industrial sector. Eventually Mexico found more oil and in 1995 the exploration of natural gas was privatized. Another part of Mexico's export industry was copper and silver which Mexico was the leading exporter of in the world. During the time from the 1980's until 1999, the manufacturing sector has provided a boost from 25% of exports to 90% exports. Interestingly enough the products manufactured, 9.2%, were outgrowing the growth rate for the manufacturing output. This isnt surprising since exporting has been promoted. References (1) http://economics.about.com/cs/economicsglossary/g/fdi.htm http://www.unescap.org/tid/publication/chap5_2069.pdf (2) http://ricks.foreignpolicy.com/posts/2010/07/28/what_an_energy_hogging_china_may_mean_for_the_us_and_global_politics http://www.nytimes.com/2007/07/29/world/africa/29power.html (3) http://aftermathnews.wordpress.com/2011/05/20/world-bank-a-new-world-order-emerging-through-global-wealth-redistribution/ http://www.merriam-webster.com/dictionary/globalization (4) http://www.wto.org/english/thewto_e/whatis_e/whatis_e.htm (5) http://www.businessweek.com/magazine/content/05_05/b3918011.htm (6) http://www.angelfire.com/nj/GregoryRuggiero/latinamericancrisis.html (7) http://www.nytimes.com/2009/01/01/business/01exports.html http://www.chinadaily.com.cn/opinion/2010-05/24/content_9886979.htm http://citywire.co.uk/wealth-manager/china-reverses-growth-strategy-on-overheating-fears/a474669 http://www.ft.com/cms/s/0/bfcc8d5c-80ef-11e0-8351-00144feabdc0.html#axzz1MuzNAxRt http://www.business-standard.com/india/news/policy-rate-hike-by-rbi-toextent/436244/ (8) http://www.nationsencyclopedia.com/Americas/Brazil-ECONOMIC-DEVELOPMENT.html http://www.nationsencyclopedia.com/economies/Americas/Mexico.html Read More