An Emerging Market Economy and Its Industrial Structure - Case Study Example

EMERGING MARKET ECONOMY- RUSSIA By of the of the School Introduction An emerging market economy (EME) refers to an economy that has per capita income that ranges from low to middle. The term was instituted in 1981 by Antoine W. Van Agtmael of the International Finance Corporation of the World Bank. Such nations constitute roughly 80% of the worldwide populace and speak to around 20% of the worlds economies. Being a loosely defined term, even countries that vary from very big to very small normally fall in this category because of their reforms and development (Arouri et al 120). For instance, China, that is deemed one of the economic powerhouses of the world is lumped into the category together with much smaller economies with significantly fewer assets or resources such Tunisia. Both Tunisia and China belong to emerging market economies because both have set out on economic development and reform programs. They have, therefore, begun opening up their markets in order to emerge onto the global scene. Emerging Market Economies are seen as the fast-growing economies (Bitzenis, 124). EMSs are in the process of shifting from a closed economy to an open economy even as they build accountability and responsibility within the system. Such countries include eastern bloc countries and former Soviet Union. Such countries tend to reform the economy so as to have a stronger and more responsible economic or monetary performance levels together with efficiency and transparency in the capital market (Kose & Prasad, 95). They also attempt to reform the exchange system as a stable local currency creates confidence in the economy. It also reduces capital flight, sending capital abroad by local investors (Braginskij & Javlinskij, 120). The EMEs also receives aid and guidance from world organizations like International Monetary Fund and World Bank and/or from large donor countries. This paper uses Russia as the EME of choice. The paper discusses the industrial structure of Russian economy. It also presents data for selected key macroeconomic indicators for this economy as well as a conclusion for the data. It concludes by discussing the benefits and costs for the emerging market and developed economies with regards to their investments in each other. Additionally, it explains why the Foreign Direct Investment (FDI) strategies differ between developed & emerging markets (Dunning, 209). Industrial structure of Russian economy Russian is an emerging economy that has a high-income mixed economy. The country has state ownership in its strategic areas of the economy. Much of its industry and agriculture was privatized by 1990’s market reforms (ÅSlund, 50). However, notable exceptions exist in the defense and energy-related sectors. Just like other major world economies, Russia heavily relies on energy revenues to drive its growth. Russia is heavily endowed with natural resources that include natural gas, precious metals and oil which constitute a major share of its exports. As on 2012, gas and oil sector accounted for 16 percent of its GDP, over 70 percent of total exports and 52 percent of the budget revenues of the federal government (Lonkila, 60). The country’s arms industry is very large and sophisticated; it is able to design and manufacture high-tech equipment, for instance, a fifth-generating fighter jet. The total value of Russian arms export was $15.7 billion in 2013, second only to the United States of America. The country’s top military exports include ships, combat aircraft, submarines, air, and defense systems. The country’s energy exports are the sole reason behind its rapid growth in standards of living, with its real disposable income increasing by 160 percent. However, such great gains are not evenly distributed as it was found out that 110 wealthiest people own 35 percent of all the financial assets that are held by Russian households. Since 2008 Forbes has repeatedly named Moscow the billionaire capital of the world. In addition, Russia is the second biggest victim of illegal money outflows. It lost more than US $880 billion between 2002 and 2011 in this same way (Luo, 39). After the collapse of the Soviet Union, Russian underwent a radical transformation, it moved from an economy that is centrally planned to a market economy that is globally integrated. The industrial structure of the country is made up of services, primary and industry sectors (Magnus, 48). Services sector is the key sector of the Russian economy as it accounts for 58 percent of the GDP. Within this sector, the most important segments includes repair of motorcycles, motor vehicles, household and personal goods, retail and wholesale trade (17% of its GDP), real estate (9%), transport, communication and storage (7%) and public administration, education and health (12%). Industry contributes 40% to the country’s total output. Manufacturing (13% of GDP), mining (11%), and construction (4%) are the most crucial industry segments (Wolf & Lang, 70). The remaining 2% is accounted for by agriculture. Primary sectors include energy, mining, fishing and forestry and agriculture. Being endowed with natural resources, the country uses oil and gas exports as the main source of hard currency. The petroleum industry of the country is the largest in the world. The company produces a relatively high per capita oil production. As of 2007, it was producing 69.603 bbl/day per 1,000 people. In addition, Russia is the top producer and exporter of gold and minerals. Approximately 90 percent of its exports to the US are in the form of minerals or other raw materials. It is the largest producer of diamond in the world. It is estimated to produce more than 33 million karats in 2013. Its fishing industry is the fourth largest in the world, behind China, United States, and Japan (Wolf & Lang, 70). Russia is more than one-fifth of the forests of the world making it the largest forest nation in the world however, a significant potential of its forests are not fully utilized making its share in the global trade in forest products to be less than 4 percent. After the collapse the Soviet Union, Russia experienced decline in agriculture for nearly ten years but due to organizational and technological modernization, it began to show some signs of improvement (Puffer, 86). Southern parts and West Siberia concentrates on grain while the Northern areas deals mainly with livestock. The new land code which was passed by the Duma in 2002 has sped up restructuring thus attracting new domestic investment in agriculture. There was a reduction on the industrial production by 2.10 percent in Russia in February 2013. This value is normally reported by the Federal State Statistics Service. Russian industrial production averaged 2.82 percent from 2006 to 2013 and in May 2010 it reached an all-time high of 12.60 percent while in January 2009 it reached a record low of -16.90 percent. In the country, the industrial production measures the yield of organizations or businesses that are incorporated in the industrial segment of the economy, for instance, mining, manufacturing, and utilities. Russia is highly industrialized among the former Soviet republics (Wolf & Lang, 70). The industry of Russia was able to emerge from a deep crisis that was caused by the Soviet Union’s dissolution in the 2000s as a result of improved state finances and increasing demand. However, since then it has experienced many years of low investment that has affected the capabilities of the industry and hence most of the country’s machines and equipments is in dire need of modernization. The country has developed significant manufacturing capabilities, outstandingly in machinery on top of its resource-based industries. The country’s aircraft and defense industries are very vital employers since they are also able to provide internationally competitive products for export (Wolf & Lang, 70). Other industries that have contributed to the economic growth of the country include the automotive industry and electronics industry. Automotive industry is very significant in the Russian economy. It has employed over 0.7 percent of the Russian total workforce or 600,000 individuals. The country is also experiencing regrowth in its microelectronics due to the revival of JCS Mikron. Selected key macro-economic indicators GDP, Bln us$ GDP per capita, Bln dollars Export, Bln. dollars Import, Bln. dollars Inflation (%) Unemployment (%) Trade, Bln. dollars Consumption expenditure, Bln. dollars GNI, Bln. dollars 2004 590.9 4094 203.4 131 10.88 8.2 109.4 398.3 576.4 2005 764 5308 269 164.3 12.70 7.6 133.6 510.5 742.3 2006 989.9 6888 333.9 207.9 9.69 7.2 179.5 655 956 2007 1299.7 9048 392 280 8.99 6.1 235.8 858.8 1264 2008 1660.8 11560 520 366.6 14.10 6.4 301.6 1108.3 1612.1 2009 1222.6 8509 341.6 250.6 11.70 8.4 201.8 922.2 1182.9 2010 1524.9 10618 445.5 322.4 6.86 7.5 277.4 1070.7 1476.3 2011 1899.1 13240 576.6 414 8.46 6.5 333.3 1274.2 1839.1 2012 2029.8 14178 597.5 449.4 5.06 5.5 357.6 1377.2 1963 2013 2096.78 14612 526.4 317.8 6.77 5.1 346.7 1490.3 2017.78 Inward FDI (US4, millions) 2004 15444 2005 15151 2006 30827 2007 32128 2008 41980 2009 36583 2010 43168 2011 55084 2012 50661 2013 56318 During 2004-2013 Gross National Income of Russia increased by US $1441.38, it increased more than 305times to 2017.78 billion US dollars. The average growth rate of the Russian GNI was 11.2 percent or 63.5 billion US dollars. The countries share in the world grew by 0.2 percent, in Europe its share grew by 3 percent while in Eastern Europe it reduced by 4 percent. In the period, the maximum GNI was in 2013 (2017.78 billion US dollars while the minimum GNI of the country was in 2004 (576.5 billion US dollars. This implies that the country is experiencing economic growth particularly due to the rise in GDP as well as net income (Wolf & Lang, 70). From the above data, the GDP of Russia grew by US$ 1505.88, which is more than 30.6 times to US$ 2096.78. The average annual growth rate of the country’s GDP is 11.7 percent or 66.4 billion US dollars. The countries share in the world grew by 0.3 percent, in Europe its share grew by 3.4 percent while in Eastern Europe it reduced by 3.4 percent. This indicates that the countries production has been on the rise despite the financial crisis experienced in 2008 and 2009 (Yeung, 162). The data from the table above exhibits an upward trend in all the selected key macroeconomic indicators. This indicates that the country has been experiencing growth despite small fluctuation due to financial crises. The country has been experiencing an improvement in inward FDI, inflation, unemployment, exports, imports, and trade. From the above data, it can be clearly seen that the Russia has a favorable (positive) balance of trade as its exports are higher than its imports. This is as a result of their high trade4 in aircraft and defense systems. Foreign Direct Investment The Foreign Direct Investment (FDI) growth has been in a constant rise since early 1980s and hence the world market for FDI has become very competitive. Emerging market economies are becoming progressively more attractive investment destinations. This investment method is very important to both developing and developed countries. It also presents some costs to both the economies. Benefits Through FDI, corporations or individuals obtain total or partial ownership of firms in other nations. It can be in the form of acquisition or establishment of a foreign affiliated company (Liu, 84). To the emerging market economy and FDI provides capital products as Multinational enterprises (MNEs) usually invest in long-term projects, take risks and repatriate profits only when substantial returns are realized from the investment. This helps in further development of the emerging market economy. Secondly, FDI provides new technology when the liberalization of flows in investments drives a more rapid rate of development in technology, diffusion and even transfer (Sharan, 72). Technological transfers through FDI have contributed positively to productivity and economic growth of the Russian economy. Thirdly, it increases market access of exports that in turn offers benefits in terms of competitive stimulus and technological learning to the country. In addition, an increase in FDI inflows increases the investment by national investors. This further enhances economic growth because national investors normally invest in other sectors particularly the ones that foreign investors are prohibited from investing in because of their sensitive nature. Fourthly, FDI leads to export growth for the developing countries; this s leads to long-run growth of the country (Peng, 196). Emerging market economies tends to liberalize their economy through favorable market reforms so as to attract foreign investors. For example, following the disintegration of the Soviet Union, Russia adopted liberal market policies to encourage a very stable policy environment for foreign investors. FDI also provides management skills, organizational technologies as well as potential cooperation with local businesses (Organisation for Economic Co-Operation and Development, 40). FDI has positive effects to the developed countries. It enables the country’s companies to expand their operations abroad. It also creates more business opportunities and leaves more potential customers for the remaining small businesses; this enhances the country’s economic growth. An MNE is able to bring new technologies to the home market or may require new business activities or operations with small businesses so as to complement its operations abroad thereby helping the small businesses to expand as well. Costs FDI has been highly criticized by developing countries because of nationalist concerns and sentiments over foreign political and economic influence. First, countries with a history of colonialism are afraid of FDI because it may result into a form of modern day economic colonialism that may expose the country as well as its resources to exploitations of the foreign companies. Even though it is true that FDI increases aggregate demand of developing countries in the short run through technological transfers and productivity improvements, it has been noted that in the long run, the country’s BOP is jeopardized after the investors has recovered its initial outlay. Further, FDI generates negative externalities in the developing country particularly in the labor market. They charge high premium is likely to disrupt the local employment market (Varese, 119). FDI results into cheap new products that create competition with the local businesses. Local businesses are forced to reduce their prices reorganize operations with regards to costs. This makes them lose their customers as well as business relations with other firms. To the developed countries, FDI enables companies to bring new techniques and products home at lower prices. This creates stronger competition with local businesses that may end up collapsing. FDI affects the capital and employment of the developed countries because its firms will concentrate more in the emerging market economies. This results into a more increase in financial position of developing country than in the developed country (Vaidya, 96). Why entry strategies for FDI differ between developed and emerging markets There are numerous entry strategies for FDI that can be applicable in both developed and emerging economies; however, they tend to vary. The first reason for the difference is the state of the economy. It is very expensive to use a green field mode of entry in a developed country because it is extremely costly to set up a factory from scratch. The labour costs are also very high; hence a state may choose to export instead (Dunning, 210). Another that may result in the difference is the country’s economic policies. Some emerging market economies restrict the acquisition of certain companies to avoid losing control over the company but encourage establishment of new enterprises to rival with the existing one in order to improve the quality and create many jobs (Liu, 128). Finally, developing markets mat prohibit FDI in order to protect local infant industries. Conclusion EMEs are economies that have per capita income that ranges from low to middle. Such economies include China, Russia, Brazil and Tunisia. Such countries tend to reform the economy so as to have a stronger and more responsible economic or monetary performance levels together with efficiency and transparency in the capital market. An emerging economy, Russian has a high-income mixed economy and has state ownership in its strategic areas of the economy. Russia heavily relies on energy revenues to drive its growth, and it is greatly endowed with natural resources that include natural gas, precious metals and oil which constitute a significant share of its exports. Its arms industry is vast and sophisticated as it is able to design and manufacture high-tech equipment. Following the disintegration of Soviet Union, Russian underwent a radical transformation; it moved from an economy that is centrally planned to a market economy that is globally integrated. This has enabled the country to experience growth despite small fluctuation due to the economic downturn. References Arouri, M. E. H., Boubaker, S., & Nguyen, D. K. (2014). Emerging markets and the global economy. Oxford, Elsevier.  ÅSlund, A. (2005). How Russia became a market economy. Washington, D.C., Brookings Institution. Bitzenis, A. (2009). The Balkans: foreign direct investment and EU accession. Farnham, England, Ashgate. 124 Braginskij, S. V., & Javlinskij, G. A. (2000). Incentives and institutions: the transition to a market economy in Russia. Princeton, NJ, Princeton Univ. Press. Dunning, J. H. (2002). Global capitalism, FDI and competitiveness. Cheltenham, Edward Elgar.  209 Kose, M. A., & Prasad, E. (2010). Emerging Markets Resilience and Growth Amid Global Turmoil. Washington, Brookings Institution Press.  Liu, H. (2001). Foreign direct investment and strategic alliances in Europe. Binghamton, NY, Internat. Business Press. Lonkila, M. (2010). Networks in the Russian market economy. Houndmills, Basingstoke, Hampshire, Palgrave Macmillan. Luo, Y. (2002). Multinational Enterprises in Emerging Markets. Copenhagen, Copenhagen Business School Press. 39 Magnus, G. (2010). Uprising will emerging markets shape or shake the world economy? Chichester, West Sussex, U.K., John Wiley & Sons.  Organisation for Economic Co-Operation And Development (Paris). (2002). Foreign direct investment for development maximising benefits, minimising costs. Paris, OECD. 40 Peng, M. W. (2011). Global business. Mason, OH, South Western Cengage Learning. 196 Puffer, S. M. (2012). The Russian management revolution: preparing managers for the market economy. Armonk, N.Y., M.E. Sharpe. Sharan, V. (2006). International business Concept, environment and strategy. Delhi, Pearson Education. 72 Vaidya, A. K. (2006). Globalization: encyclopedia of trade, labor, and politics. Santa Barbara, Calif, ABC-CLIO. 96 Varese, F. (2005). The Russian mafia: private protection in a new market economy. Oxford [u.a.], Oxford Univ. Press. Wolf, C., & Lang, T. (2006). Russias economy: signs of progress and retreat on the transitional road. Santa Monica, CA, RAND. Yeung, H. W.-C. (2007). Handbook of Research on Asian Business. Cheltenham, Edward Elgar Pub.  162 Read More