BRICS Participation in Global Gross National Income - Case Study Example

BRICS ECONOMIES and BRICS Economies Introduction BRICS economies have played a significant role in the global economy in recent years. Among the BRICS are Brazil, China, South Africa, Russia and India. The total population in those countries is 40% of the world population. Additionally, they contribute a significant amount of the world GDP, approximately $15 trillion as per 2011 statistics. The economy of BRICS states has risen significantly in the past few years, as such; they are seen to have the fastest economic growth. China, one among the BRICS is likely to be the biggest economy in the next 30 years far more than the United States. The increasing economy in BRICS has led a significant increase of foreign direct investments in those states. Multinational companies have also risen in BRICS as a result of the increase in economy. MNC have been eying BRICS as the potential market for their commodities. About BRICS The four countries, China, Russia, Brazil and India were recognized in 2001 as the most influential states economically and politically. As a result of increasing economic power in the mentioned states, it was noted that their political and economic power, as well as demographic development, is important. It was seen as significant in such a way that their economic growth will be the leading in the future (Matovska, Trajkoska, & Siljanovska, 2014, p. 372). Additionally, some economist argued that BRICS should be among the G7 members. China, Russian, India and Brazil came together for the first time in 2006. South Africa was later invited to join the group in 2010 where it formed BRICS. The economy of the five states is so influential and more so to the low-income countries (Pedro et al. 2012, p. 8). Studies reveal their influential is because of their demographic and geographic dimensions. The five states have been promoting the stability of investment and trade. Additionally, they have assisted the global economy in cushioning the global financial crisis. However, the lower economic growth of BRICS in 2009 as a result of the global recession caused a huge setback in foreign trade for lower income countries. Lower income countries are countries with the high number of poor people. Close to 1 billion of 1.4 billion poor people globally lives in lower income countries. It is estimated that the poor persons in those countries survive on less than 1 dollar per day. In addition, Lower income countries cannot survive the external shocks such as increasing costs of fuel, food and other commodities. There is also a problem of European economic crisis that has had a profound effect on the global economy and more to lower income countries. Lower income countries are partners of EU, and they also trade directly with the European countries. There is a need to assist lower income countries from increasing level of poverty and lack of food as a result of economic recession. BRICS have emerged as saviour to the global economy and more to low-income countries. They have caused significant changes in the formation of international development cooperation on trade and financial inflows as well as emerging donors (De Almeida, 2009, p. 3). Emergence of BRICS from developing to emerging economies For the last ten years, BRIC have come together and increased their strong position in global economy. BRICS’ participation in global Gross National Income (purchasing power parity) shows that they will increase their share in the future. China and India have been expanding in terms of purchasing power parity. This, however, is in expense of European Economies that are likely to be overtaken by BRICS in terms of purchasing power parity (Pedro et al. 2012, p. 7). Sources: Orgaz et al. 2011: 19 (citing IMF and World Bank data). The figure above reveals the share of global gross national income in purchasing power parity expressed in percentage. OECD took the large percentage in 1980s, but the percentage reduced towards the 21st century. China and India have so far claimed 17 and 6.3 percent of the Share. It is estimated that by the end of 2015, BRIC will contribute a significant share of the global economy. There are several aspects that will make BRICS the leading economies in the future. Among the facets are; their size of the economy, increasing the growth of their economy and changes in their political system. There are some countries outside BRICS with the above characteristics. However, many have only one or two of the mentioned features. Previously in 2001, Russia was seen as odd among the BRIC due to uncertainties of its economy. As opposed to that, Russian has the highest standards of education. The state of Russia also has strong microeconomic policies and positive growth of investment. The population of Russia is close to 140 million and its purchasing power parity is similar to Brazil’s. South Africa, one among the BRICS does not have the characteristics mentioned earlier. South African economy is much smaller than any of BRIC. For example, its GDP is estimated to be a third of Brazil or Russian economy. Furthermore, the estimation of the South African economy shows that it is less than a fraction of China’s economy. However, South Africa has the greatest economy in its continent. It is also the most influential country politically in its continent. As a result of its influence, South Africa is ranked as the upper middle-level country in the world. Developed and Developing Countries Many companies are shifting their operations to developing countries or emerging economies such as BRICS. What could be the cause of this move? There is a need to have a clear picture of the two categories; developed and developing countries. The difference between the two categories is their per capita income. For example, while, per capita income of developed countries is above $12, 275, per capita of developing countries is less than the mentioned figure. Developed countries were the most influential in the last ten years. Most of the economic activities were traced back to developed countries. As a result of this, a significant percentage of global GDP comes from developed countries. The United States contributed the largest share of global GDP in 2000, approximately 30.9%. As such, the U.S. was the largest economy in the world. Japan, Germany, and France contributed 14.5%, 5.9% and 4.2% respectively. As a result of high economic activity in emerging economies, most competitive and large firms were found in those countries. Such companies are also from developed countries. For example, in the U.S. there are a large number of competitive companies; approximately 37%. Germany, Japan, and France are also home to large competitive companies at approximately 7.4%, 20.8%, and 6.8% respectively (Mpoyi, 2012, p. 37). However, there has been a high competition for companies operating in advanced economies. Firms used the strategies to diversify its operation so as to achieve a high competitive advantage among others. In an effort to maintain their competitive advantage, the companies expanded their operations to other countries. As such, it led to international competition. Expansion to the international market was an advantage to many companies from developed countries. Benefits are attributed to the low cost of operation and quality of factors of production. Some of these factors include energy, labour, and capital. Additionally, massive investments in global markets contributed to a significant decrease in cost of operation. It also led to a positive change in quality of production (Mpoyi, 2012, p. 37). Furthermore, reputable companies such as, Siemens McDonald’s, Ford Motor Company Sony, Coca-Cola and General Motors expanded to international markets due to increased inflow of foreign direct investments. Automakers are some among many companies that routed their production to foreign markets. They not only expanded to international markets but also moved their production from developed countries to developing countries. For example, it is estimated that close to half of production operations were conducted in advanced economies in 2000. Ford, Toyota, and General Motors operated in domestic markets. Their production in the domestic market was 60%, 64% and 74% for Ford, GM, and Toyota respectively. However, after a few years later, many of those automakers relocated their production operations to developing countries. It is estimated that their move of production to developing countries led to a significant drop in production on their home ground. An increase of FDI in developing countries led to a shift of automakers to developing countries. The top automaker in the world GM moved a significant share of production portion from North America to China. It was a change that saw a large number of GM vehicles produced in China as opposed to the previous decade. In 2009, GM production in China was more than the combination of production in the U.S. and Canada. Approximately 1.8 million vehicles were produced in China in 2009 while production in developed countries was less. Other sectors outside the auto industry were also expanded to developing countries. Companies from advanced economies shifted their operation of emerging economies especially India and China, Russia and Brazil. The move to international market meant that the company required a new workforce. However due to geographical diversification the companies could not take their previously trained workforce to assist them. The companies had to have managers and technology experts to work in their firms. Local people were available in large number. A company had to train them so as to have necessary skills to operate in factories and offices. Training of people in emerging economies led to an increase in number of people with skills capable of starting their businesses. Many countries had a change in their reforms in order to attract more of foreign investors and international companies. Most of the reforms covered political and economy of such states and as a result of that, powerful economies such as BRICS came up. The first few years of 21st was characterized by rising number of emerging economies. BRICS and other economies started expanding rapidly and by 2009 they had already surpassed some countries that had a large share of the economy globally in 2001. The U.S., however, still maintained the top position globally as the largest economy by 2009. However, emerging economies such as India and China were developing rapidly. Singh (2012. p.397) shows that emerging economies and emerging economic firms resulted from economic reforms and globalization in 90s. Emerging economies have led to significant increase in both inflow and outflow of FDI. In addition, it was noted that the growth of outward FDI has risen in emerging economies much higher than advanced economies. For example, the author reveals that FDI outflow in emerging economies rose from US$65 billion to US$859 billion between 1990s and 2003. The increase in outward FDI has led to a significant contribution to global FDI outflow. Additionally, there has been an increase in the number of exports from emerging economies, close to 45% of the global exports come from developing economies (Elfakhani & Wayne Mackie, 2015, p. 99). Implications on MNCs Emerging economies have had a profound effect on the global economy as noted above. As a result their contribution to the global economy, they have played an important role in global economy. However, their contributions to the global economy have also contributed a number of implications for multinational companies (Elfakhani, &Mackie, 2015). The authors present a case of TATA Group Company in India and Lenovo in China. The two companies expanded both locally and internationally. TATA group is said to have acquired 28 firms locally and firms outside India of approximately USD$ 12 billion. Expansion of emerging economy firms locally and internationally is a treat to MNCs. Rugraff and Hansen (2011, p. 13) explains that MNC is both beneficial and detrimental to emerging economies. The advantage of MNCs to emerging economy is calculated from factors conditions to FDI impacts. Some of the impacts are government policies, the entry strategies of MNCs, the motives of MNCs and the capacity of the industry to take in MNCs. References De Almeida, PR 2009, The BRICS’ role in the global economy, Trade and International Negotiations for Journalists, Rio de Janeiro. Elfakhani, S, & Mackie, W 2015, ‘An analysis of net FDI drivers in BRIC countries’, Competitiveness Review, Vol. 25 Iss 1 pp. 98 – 132. Matovska, M, Trajkoska, J, & Siljanovska Z 2014, ‘The Impact of BRICS from Economic, Legal and Political Aspect in the International Community’, European Scientific Journal, vol.1 pp. 370-375. Mpoyi, RT 2012, ‘The Impact of the “BRIC Thesis” and the Rise of Emerging Economies on Global Competitive Advantage: Will There Be a Shift from West to East?’ Journal of Applied Business and Economics vol. 13(3), pp. Pedro, DM, Irene, K, Doris, K, & Thobias, S 2012, The Role of BRICS in the Developing World. European Union, Brussels. Rugraff, E, & Hansen, MW 2011, Multinational Corporations and Local Firms in Emerging Economies, Amsterdam University Press, Amsterdam. Singh, D 2012, ‘Emerging economies and multinational corporations’, International Journal of Emerging Markets, Vol. 7, 4 pp. 397 – 410. Read More