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Lecture 10

AFM 333 Lecture 10: Chapter 10 AFM 333

8 Pages
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Department
Accounting & Financial Management
Course Code
AFM333
Professor
clarkhampton

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Chapter 10
Emerging Markets, Developed Economies, and Advanced Economies
- Emerging markets are like China, Turkey, India, that are experiencing rapid
growth
- Emerging markets have high risk environments from evolving commercial
infrastructure and legal systems but also have attractive markets with low
cost manufacturing
- Emerging markets are beginning to produce top competitive firms,
challenging the advanced economies
- Many of these competitive firms (challengers) are family run so it is easy to
make quick decisions and cheap to manufacture in their home countries
- Other challengers benefit from large resource pools, an example is Russia
- Advanced Economies are post industrial countries characterized by high
per capita income, highly competitive industries, and well developed
commercial infrastructures (e.g. Canada, Australia, Japan)
- Developing Economies are low income countries characterized by limited
industrialization and stagnant economies, largest group, (e.g. Bangladesh,
Zaire)
- Emerging Economies are former developing economies that have achieved
substantial industrialization, modernization, and rapid economic growth
since the 1980s (e.g. Brazil, Russia, India, China)
- Advanced economies are the most visible, being the most brightly lit
- Advanced economies consume the most energy
Advanced Economies
- Evolved from manufacturing to service based economies
- 14% of the population
- Account for half the world’s GDP, over half of world trade in products, ¾ of
world trade in services
- Have democratic, multiparty governments
- Economic system is usually built on capitalism
- Tremendous purchasing power with few restrictions on trade and
investment
- (ost the world’s largest MNEs
Developing Economies
- Consumers in these economies have low discretionary income
- 17% of citizens in developing economies live on less than $1/day
- 40% live on less than $2/day
- Combination of low income and high birth rate means there is high poverty
- Can also be called underdeveloped or third world countries
- Tend to be highly developed in terms of culture and history
- High infant mortality, malnutrition, short life expectancy, illiteracy, and poor
education systems
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- Less than 50% of children finish primary school, hindering economic
development
- 95% of the world’s A)D population is from developing economies
- Sick adults cannot work, therefore they cannot provide for their children, and
productivity is stagnant
- Government is usually severely indebt, some have debt levels higher than
their GDP
- Much of their poverty is because there are government policies discouraging
entrepreneurship, trade, and investment
- Bureaucracy and red tape in developing economies deter firms from these
countries from participating in the global economy.
- When countries are cut off from global economy, the result is increased
poverty and unemployment, causing revolution, terrorism, and war
Emerging Market Economies
- Rapidly improving living standards and a growing middle class with rising
economies aspirations
- Some countries in this group are growing so rapidly, they may be considered
advanced economies in the future (e.g. Hong Kong, South Korea, Israel)
- Some countries in the developing economies group may become emerging
markets soon, called frontier economies e.g. Costa Rica, Panama, Uruguay
- Economic prosperity varies within the countries, there are often separate
urban and rural areas, urban areas with more discretionary income and
developed economic infrastructures
- Transition Economies: subset of emerging market economies that have
changed from centrally planned economies to liberalized markets
- They have been transformed mainly through privatization, which is transfer
of state owned industries to private concerns
- Starting to implement legal frameworks to protect business and consumer
interests, as well as, ensure intellectual property rights
- Privatization allowed foreign firms to enter transition economies by
purchasing former state enterprises
- Emerging markets count for more than 40% of world GDP, 30% of exports,
and 20% of FDI
- GDP growth of 7% in the mid 2000s
- Advantages are low cost labour, knowledge workers, government support,
low cost capital
- Have new global challengers that enter the global market and becoming key
contenders
- China is the largest in the group, with 1.3 Billion population and 1/5 of the
world’s population
What Makes Emerging Markets Attractive?
Emerging Markets as Target Markets
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- Growing middle class means rising demand in various consumer products,
such as electronics and automobiles, and various services such as healthcare
- Business in emerging markets are important targets for machinery and
equipment
- In a similar way, governments and state enterprises in emerging markets are
major targets for sales of infrastructure-related products and services such
as machinery, power transmission equipment, transportation equipment,
high-technology products, and other products that countries in the middle
stage of development typically need.
Emerging Markets as Manufacturing Bases
- Advanced economies have used large sums to develop manufacturing
facilities in emerging markets
- Low wage, high quality labour for manufacturing and assembly options
- A lot of emerging market companies are becoming world competitors in
various industries Example: the world’s number three and four top-selling
beer brands are pro- duced by new global challengers based in Brazil
(Skol, made by InBev) and China (Snow, made by China Resources Snow
Breweries)? Together, these firms produce more than 50 million barrels of
beer annually
Emerging Markets as Sourcing Destinations
- In recent years, companies are transferring or delegating non core tasks to in
house groups or special contractors, also known as outsourcing
- Outsourcing: procurement of value adding activities from independent
suppliers or company owned subsidiaries
- Outsourcing helps companies concentrate on core operations and obtain
competitive advantages
- When sourcing relies on foreign suppliers or producers, it is known as global
sourcing/offshoring
- Global Sourcing: the procurement of products or services from independent
suppliers or company owned subsidiaries located abroad for consumption in
home country or a third country
- Investments from abroad helps emerging markets since they lead to new
jobs and production capacity, transfer of knowledge, and know
hows/linkages to the global marketplace
Assessing the True Potential of Emerging Markets
Per Capita Income as an Indicator of Market Potential
- Gross national income or per capita GDP are good measures for the potential
in individual markets
- Per Capita GDP converted to US or reference currency may not be a good
measure since it overlooks the price difference between advanced and
emerging markets
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Description
Chapter 10 Emerging Markets, Developed Economies, and Advanced Economies - Emerging markets are like China, Turkey, India, that are experiencing rapid growth - Emerging markets have high risk environments from evolving commercial infrastructure and legal systems but also have attractive markets with low cost manufacturing - Emerging markets are beginning to produce top competitive firms, challenging the advanced economies - Many of these competitive firms (challengers) are family run so it is easy to make quick decisions and cheap to manufacture in their home countries - Other challengers benefit from large resource pools, an example is Russia - Advanced Economies are post industrial countries characterized by high per capita income, highly competitive industries, and well developed commercial infrastructures (e.g. Canada, Australia, Japan) - Developing Economies are low income countries characterized by limited industrialization and stagnant economies, largest group, (e.g. Bangladesh, Zaire) - Emerging Economies are former developing economies that have achieved substantial industrialization, modernization, and rapid economic growth since the 1980s (e.g. Brazil, Russia, India, China) - Advanced economies are the most visible, being the most brightly lit - Advanced economies consume the most energy Advanced Economies - Evolved from manufacturing to service based economies - 14% of the population - Account for half the worlds GDP, over half of world trade in products, of world trade in services - Have democratic, multiparty governments - Economic system is usually built on capitalism - Tremendous purchasing power with few restrictions on trade and investment - Host the worlds largest MNEs Developing Economies - Consumers in these economies have low discretionary income - 17% of citizens in developing economies live on less than $1/day - 40% live on less than $2/day - Combination of low income and high birth rate means there is high poverty - Can also be called underdeveloped or third world countries - Tend to be highly developed in terms of culture and history - High infant mortality, malnutrition, short life expectancy, illiteracy, and poor education systems - Less than 50% of children finish primary school, hindering economic development - 95% of the worlds AID population is from developing economies - Sick adults cannot work, therefore they cannot provide for their children, and productivity is stagnant - Government is usually severely indebt, some have debt levels higher than their GDP - Much of their poverty is because there are government policies discouraging entrepreneurship, trade, and investment - Bureaucracy and red tape in developing economies deter firms from these countries from participating in the global economy. - When countries are cut off from global economy, the result is increased poverty and unemployment, causing revolution, terrorism, and war Emerging Market Economies - Rapidly improving living standards and a growing middle class with rising economies aspirations - Some countries in this group are growing so rapidly, they may be considered advanced economies in the future (e.g. Hong Kong, South Korea, Israel) - Some countries in the developing economies group may become emerging markets soon, called frontier economies (e.g. Costa Rica, Panama, Uruguay) - Economic prosperity varies within the countries, there are often separate urban and rural areas, urban areas with more discretionary income and developed economic infrastructures - Transition Economies: subset of emerging market economies that have changed from centrally planned economies to liberalized markets - They have been transformed mainly through privatization, which is transfer of state owned industries to private concerns - Starting to implement legal frameworks to protect business and consumer interests, as well as, ensure intellectual property rights - Privatization allowed foreign firms to enter transition economies by purchasing former state enterprises - Emerging markets count for more than 40% of world GDP, 30% of exports, and 20% of FDI - GDP growth of 7% in the mid 2000s - Advantages are low cost labour, knowledge workers, government support, low cost capital - Have new global challengers that enter the global market and becoming key contenders - China is the largest in the group, with 1.3 Billion population and 1/5 of the worlds population What Makes Emerging Markets Attractive? Emerging Markets as Target Markets- Growing middle class means rising demand in various consumer products, such as electronics and automobiles, and various services such as healthcare - Business in emerging markets are important targets for machinery and equipment - In a similar way, governments and state enterprises in emerging markets are major targets for sales of infrastructure-related products and services such as machinery, power transmission equipment, transportation equipment, high-technology products, and other products that countries in the middle stage of development typically need. Emerging Markets as Manufacturing Bases - Advanced economies have used large sums to develop manufacturing facilities in emerging markets - Low wage, high quality labour for manufacturing and assembly options - A lot of emerging market companies are becoming world competitors in various industries Example: the worlds number three and four top-selling beer brands are pro- duced by new global challengers based in Brazil (Skol, made by InBev) and China (Snow, made by China Resources Snow Breweries)? Together, these firms produce more than 50 million barrels of beer annually Emerging Markets as Sourcing Destinat
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