Globalization and Emerging Markets

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Globalization and Role of

Emerging Markets

A Classroom PresentationBy

Muhammad Diljan

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Mr. Dawood graduated from CECOS University Peshawar works

in UAE for a German Company financed by China Bank and five

American Investor, Audited by Indian CA firm working under an

MOU with CPA(USA). He has four colleagues. One belongs to

Ghana and the others belong to Moscow, Madagascar and

Baghdad. Their boss is from Ukraine having a doctorate fromUniversity of Sydney. They all speak English and contact with

their families through skype phone. And the most interesting, he

has married to a Russian Lady and his company is following US

GAAP. Mr. Dawood is a practical Muslim of strong values but hispartner is still going to a catholic church, but both are happy in

life believe in freedom, democracy and human rights.

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This paragraph was nothing except

a binary data of the picture ofGLOBALIZATION.


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WHAT IS GLOBALIZATION?

Thus Globalization is the process of

integration of people, companies and

governments of different nations across theGlobe through economic, political and social

activities, aided by high speed means of

transportation and communication.

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ECONOMIC GLOBALIZATION AND EMERGING

MARKETS

Current wave of economic globalization is driven by

policies that have created business and investment

opportunities for international investors in

developing countries due to which these countries

which were ,before 1980, referred to as developing

countries started being called Emerging Markets

after 1980.

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Thus you can say that Financial Globalization

is the mother of EM.


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ROLE OF EMERGING MARKETS IN

GLOBALIZATION

The role of EM in Modern Globalization can be

assessed on three different platforms namely;

Economic Globalization

Political Globalization

Social & Cultural Globalization

But as a students of Business Administration ourdiscussion will revolve around Economic

Globalization.

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Among emerging markets Brazil, Russia, India andChina are the most evaluated and embarked upon byeconomists, social scientists, students and researcherswhenever they intended to explore the global players

of the new world order game among the developingcountries. These countries are collectively called BRICsand were identified in 2001 at that time it was statedthat over the next 50 years these four countries couldbecome a much larger force in the world economy .

Such like statements at that time received attentionbecause it was forecasted that the growth in the BRICcountries would beat the growth of the G7 advancedeconomies.

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GLOBALIZATION


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After the end of cold war while the United Statesappeared to be the winner from the fall ofcommunism, the new economic order that was emergingin the 1990s had profound political, social and

cultural implications. The new players were emergingand a new generation of leaders appeared in each of thefour countries.

Many governments in emerging markets adopted free-

market economic systems, vastly increasing their ownproductive potential and creating many newopportunities for international trade and investment.

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GLOBALIZATION


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BRICs countries were not and members of the G-7 butthey were going to gain influence and internationalpresence.

The increasing production capacity of BRICs was always

thirsty of external finances. Which motivated developednations to globalize their financial and investmentactivity to these countries.

The interplay between the BRIC economies and the G-7 is viewed by the investment community as acritical aspect of globalization and interdependence.

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GLOBALIZATION


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The BRICs have slowly gained greater influence overthe international decision making process, which hasbeen dominated by the major industrial countries-the G7- since the end of the Second World War.

There have been important points of convergence onbroad issues since the start of the 21 st century.These issues includes a new global trade regime, anew financial architecture and an expanded role of the

BRIC countries in the workings of the multilateralfinancial institutions such as the InternationalMonetary Fund (IMF) and the World Bank .

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GLOBALIZATION


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While Chinas growth depends on the export ofmanufactured goods to the US and Europe, Brazilfocuses on agricultural exports. Russia sells oil, naturalgas and other natural resources abroad, while Indias

growth has been based largely on its domestic market.The BRICs are geopolitically and economically unique.There is an appealing symmetry in the fact that Russiaand Brazil have an abundance of the raw materials thatChina and India need to grow and improve their

infrastructure. It is interesting to see that China hastaken over as Brazils main trading partner. In 2010,China also became Russians main trading partner.

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GLOBALIZATION


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Up to the most recent financial crisis in 2008, the BRICs have certainly

lived up to their promise. Their rapid growth rate of economic development,

huge developmental potential has attracted a large amount of foreign direct

investment (FDI). In 2010, Direct Investment (FDI) of the BRICs accounted for

two third of the total amount of FDI in G7 countries. China is by far the

leading emerging market destination of FDI, the country received $106

Billion FDI inflows in 2010, followed by Brazil, which received $48.4 billion. India

is on number three in 2009 while Russia still lags behind Indias 2009 statistics.

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ROLE OF EMERGING MARKETS IN GLOBALIZATION


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Inward FDI to the BRICs have been distributed to different

industries. In China and Russia it has mainly centered on thesecondary industry, while in Brazil and India the focus hasbeen on the tertiary industry. The Service industry has beenthe preferred for inward FDI in Brazil due to its specialopenness policy. It is legal for foreign investors to hold stockshares in manufacturing industry as well as invest inresource utilization and infrastructure construction. Thefinancial sector, transport and telecommunications inparticular, have attracted huge amount of inward FDI. InRussia, fuel industry and metalwork industry has been themain recipient, while in India software, the financial sector

and consulting sector have had incredible development overthe years due to inward FDI. In China, there have been greatinvestments in the manufacturing industry, but the servicesector has also developed significantly.

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ROLE OF EMERGING MARKETS IN GLOBALIZATION


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ROLE OF CHINA IN ECONOMIC GLOBALIZATION

China's investment climate has changed dramatically

with more than two decades of reform. In the early

1980s, China restricted foreign investments to

export-oriented operations and required foreigninvestors to form joint-venture partnerships with

Chinese firms.

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Since the early 1990s, the government has allowedforeign investors to manufacture and sell a wide range

of goods on the domestic market, provided some

assurances against nationalization, allowed foreign

partners to become chairs of joint venture boards, andauthorized the establishment of wholly foreign-owned

enterprises. China also authorized some foreign banks

to open branches in Shanghai and allowed foreign

investors to purchase special "B" shares of stock in

selected companies.

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Today foreign-invested enterprises produce about5860% of China's exports (the majority of China's

foreign investment come from Hong Kong, Macau

and Taiwan), and China continues to attract large

investment inflows.

From 1993 up till now , FDI in China is increasing and

in 2010 it was the world's second-largest recipient of

foreign direct investment after the United States.

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In 1991 Chinese government initiated a strategy named GOOut Policy to promote Chinese investments abroad. Since

the launching of the Going out Strategy, interest in overseas

investments by Chinese companies has increased

significantly especially among State Owned Enterprises.

From 1993 to 2010, Chinese companies have been involved

as either an acquirer or acquired company in 25,284 mergers

and acquisitions with a total known value of US$969

billion. The number and value of deals hit a new record in

2010. The number of deals that happened in 2010 has been3,640 which is an increase of 17% compared to 2009. The

value of deals in 2010 was US$196 billion which is an

increase of 25% compared to the year before.

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We see that as the economic globalization isprogressing the connection between chinas economy

and global economy is becoming tighter. Today it is

believed that global economic development can not

go with out China. A doctor from the Hanoi Universityof Vietnam told People's Daily that China's economic

development injecting new energy into the regional

and global economy and China's steady economic

development gives the world's confidence on the early

recovery of the global economy after the drop down

of international financial crisis.

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According to Dr.Martyn Davies (a former Ex:Director of the

Confucius Institute), China is not currently obsessed of

developing hard power such as military force but keeps

showing its soft power using its economic and cultural muscle

to build up the international relations.

Chinas sharp and two-digit economic growth is considered aneconomic miracle in the world fostering and creating many

commercial opportunities which are attracting overseas

investors to invest and start businesses in china. Meanwhile,

products Made in China are also going global and accepted bythe world. Low price and high quality are now a general

impression of Chinese products in the global market.

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Kamer Kasim, vice director of Turkeys International Strategic

Research Organization told Peoples Daily that Chinas economicdevelopment is very remarkable and has both economic and

political significance for the world. China, as the 2nd largest

economy of the world, not only produces huge amounts of

industrial products, but also promotes the development of the

whole industrial chain covering from the raw material to the

product research and development. According to him China is

driving the global economy as engine. Further he mentions that in

todays International System of Mutual-Dependence China needs

oversea markets as well as raw materials, and other countries alsoneed Chinas cheap but good products, which reduce the

possibility of a world war breaking out. This phenomenon, which is

especially outstanding in the China-U.S. relations, promotes the

global peace, stability and development. 23


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ROLE OF RUSSIA IN ECONOMIC GLOBALIZATION

Russia is increasingly becoming considered a country with astable investment climate. Russia has witnessed a large increase

in foreign direct investment inflows over the last few years, due

to a growing domestic market, rich human capital, natural

resources and political stability.

Constraints on foreign business are being abolished and the

regulatory environment has improved. However, several sectors

remain closed to foreign investment.

Current regulations restrict foreign involvement in the banking

sector, and the government has restricted foreign access to 39strategic sectors of the Russian economy, including nuclear

energy, natural monopolies, military and special machinery, the

space industry, and subsoil development.

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Russian investment policy includes tax reliefs, reducedadministrative barriers, and developing private-public

partnerships. The government is planning to invest in

infrastructure projects to promote foreign investment.

Among improvements for investors, Russia now has the lowest

corporate tax rate of any G7 or BRIC country.

The government is planning to shorten the time period for

foreign enterprises to receive permission on investment

projects. The recently formed Department of State Control of

Economics is in-charge of removing barriers for foreigninvestors.

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From 1993 to 2010, Russian companies have been involved aseither an acquirer or acquired company in 13,834 mergers and

acquisitions with a total known value of $613 billion.

The number of deals that happened in 2010 have been 3,662,

which is a new record. Compared to 2009 this was an increase of12%.

The value of deals in 2010 was US$100 billion, which was the

second highest number ever; compared to 2009 this was an

increase of 143%.

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Russia were very resistive to the financial globalization up till

1991 but after that it started economic reforms towards gradualprivatization which made it adoptable to global financial

activities.

Up til 2005, Russia was seen as a major buyer of western and US

made consumer goods but after 2005 its trade with Chinaincreased and it become a major consumer market for China

products (24% of China exports).

Russia ranks second in the world in export of armaments and

has always retained solid positions on the global arms market.

Russia contribute a huge number of educated and skillful human

resources to the global economy as most active labor force in

Russia prefers to migrate abroad. There are now about two

million migrants from the former Soviet Union in Germany, and

about a million in the U.S. 30


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In Russia education standard is high as compared to

international standard. At the Russian universities, the numberof applicants for the departments of physics, biology, mechanics

and mathematics is very high as compared to other countries.

These professions are in great demand in all over the developed

world and Russians in these fields are welcomed and hired at

preference in scientific labs of multinational companies. In U.S.

laboratories Russian Scientists and engineers are seen more

than the average of other countries.

Russia is also a greatest supplier of energy (oil, gas, coal,

aluminum and chemicals) to the global economy.

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ROLE OF BRAZIL IN ECONOMIC GLOBALIZATION

Brazils economy is the largest in Latin America with a GDP of USD 2.1

trillion in 2010 . Years of economic growth, credible macroeconomic policies

and a rising middle class have positioned the country as a leading recipient of

foreign investment and an emerging player in global commerce. These

factors make the economy one of the worlds most dynamic and promising

forces among emerging markets. Brazil is said to be the third-most-attractive

country for future FDI, behind China and India.

Brazil has one of the most liberal investment climates for outside investors.

Foreign investors, both individuals and legal entities, can invest in most of the

financial and capital market instruments available to resident investors,

without any restrictions. However, Foreign investors are required to hire local

entities to act as custodian and representative for regulatory and tax related

issues. Investors are also required to complete other formalities likeregistering with the Brazilian Central Bank, the stock market regulator CVM

and the Federal Revenue Service.

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Between 1993 and 2010, 7.012 mergers & acquisitions with a total known

value of $707 billion USD with the involvement of Brazilian firms have been

announced.The year 2010 was a new record in terms of value with $115 bn. of

transactions. The largest transaction with involvement of Brazilian companies

has been: Cia Vale do Rio Doce acquired Inco in a tender offer valued at

$18.9 billions.

More over, Brazil is emerging as a global economic powerhouse, with agrowing middle class and a booming trade relationship with China fueled by

the Asian giants need for commodities such as soybeans and oil,

According to a prediction, Brazil will surpass Britain this year as the sixth

largest economy in the world, with a GDP of $2.44 trillion against Britains

$2.41 trillion. By 2020, Brazil will be the fifth largest economy in the world.The country is now the leading world exporter of iron, coffee, soybeans,

orange juice, sugar and beef. Brazil is also home to one of the worlds largest

oil reserves.

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ROLE OF INDIA IN ECONOMIC GLOBALIZATION

Since liberalization, the value of India's international trade has increased

sharply, with the contribution of total trade in goods and services to the GDPrising from 16% in 199091 to 47% in 200810.

India accounts for 1.44% of exports and 2.12% of imports for merchandise

trade and 3.34% of exports and 3.31% of imports for commercial services

trade worldwide.

India's major trading partners are the European Union, China, the UnitedStates of America and the United Arab Emirates.

In order to encourage FDI in India, the process of regulation and approval has

been substantially liberalized. They have introduced a special procedure for

FDI called FDI Automatic Route. Under automatic route does not require anyprior approval either by the government or Reserve Bank of India (RBI).

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India offers low-cost but educated and English speaking youth

consisted human resources to the global economy for IT andBusiness processes outsourcing.

India and China are amongst the most pro-competition

countries. India produces bountiful of software engineers and

software analysts, while China supplies all kinds of equipments.

So, as per the current scenario, the conclusion has been derived,

"India as back office supplier, China as front office supplier.

As many educational institutions of developed countries have

globalized their services, India also has also started to follow

their footsteps.

India is also involved in mergers and acquisitions, throughout its

history from 1991 but showed huge increases from 2005

onward. India is beating Brazil but lagging behind Russia in the

race of Mergers and Acquisitions. 40


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