“Don’t use a cookie cutter approach when evaluating emerging economies,” warned Dr. Jahangir Boroumand, professor at the Smith School of Business at the University of Maryland. His sentiments were echoed by Dr. Paolo Prochno, also of Smith, during the kick-off event for the newly formed Emerging Markets Club at the school.
The task of defining an emerging market is tricky, if not outright impossible. Just consider the following examples. A few years ago, “emerging” countries were those that had taken on overwhelming levels of debt (think the Latin American crisis of the 1980s). But today, that framework would include Greece, Italy, the US, and Iceland. In years past, North-South capital flows dominated development discussions. However, that trend is quickly changing as nations like Brazil and China trade directly with one another – even using their own currencies for transactions! Formerly, industrialized countries entered developing markets for cheap labor and/or natural resources. But even this characterization is becoming outdated. Many companies now operate in emerging nations to gain knowledge. This was particularly true in Brazil when American automakers tried to lean how to build small cars efficiently and profitably. Finally, multi-nationals are now based in places well beyond North America and Western Europe employing thousands of people throughout the world – think Samsung and Tata.
Even though emerging markets are very different from only a decade ago, there are three areas that should always be considered when comprehensively analyzing a industrializing country: infrastructure, information availability, and government intervention. Infrastructure in this context includes physical (electricity), financial (stable banks), and legal (enforceable law). While it may seem obvious that simple things like paved roads, check clearing, and contract law are necessary for smooth business, you might be in for a rude awakening if you are not prepared to deal with these differences.
Beyond infrastructure, emerging economies lack the circulation of free, accurate, and timely information. This is becoming less true with the explosive growth of cell phones in developing nations, but the mass quantities of vetted data to which we are accustomed in the industrialized world is exceedingly rare outside of it. Finally, the liberal (and I mean it in the classical sense) approach to government and business interaction common in North America and Western Europe is vastly different from our counterparts in the developing world. Take China and India as examples. Even though both markets are opening, there is a government “legacy” that is entrenched with business – a fact with which any prospective investor must come to terms. Perhaps these guideposts can help lead us to better analysis of the exciting developments taking place in emerging markets today.