Part A ...

Global Economy, Emerging Markets and Entrepreneurship

Part A

1. What are main factors attracting firms to invest in emerging markets and what are the main deterrents?
2. How have these been changing in recent years?

You should consider both economic factors and political and institutional issues.

2.1 Changes in recent years

• Lower growth in developed markets in the next years
  Stagnating or shrinking mass market
  Fragmented growth market
  Cross-channel shopping, rise of discounters and online grocery
  activist investors
  financial pressure on CPG companies
  Tighter regulation
  New labor and employment norms (generation Y, working hours)
  
  

Points for part 1

- Open economies with skilled workforce and good growth prospects tend to attract larger amounts of foreign direct investment than closed, highly regulated economies (Singh, 2012)

- What are the macro-economic determinants in attracting FDIs to an emerging economy? The human resources of a country plays an important role in attracting foreign direct investors to a country. the human resource determinant is the availability of a relatively cheaper yet educated labor force. (Singh, 2012)

- A strong correlation exists between FDI and a country’s market-size as measured by the gross domestic product per capita, in other words, a market with good spending capabilities offer is attractive to investors. (Singh, 2012)

- Infrastructure facilities such as quality telecommunications, electricity, roads and railways play an important part of decision making. (Singh, 2012)

- Other factors such as the appropriate regulatory environment and low corporate income taxes attract FDIs. (Singh, 2012)

Points for part 2

- Foreign direct investment into emerging markets—the lifeblood of economic growth for industrializing nations—is set to slide to postcrisis lows this year, curbed in part by U.S. President Donald Trump’s protectionist trade agenda. (Talley, 2017)

- The Institute of International Finance, a group representing more than 500 of the world’s biggest banks, hedge funds and other financial firms, said Thursday that foreign direct investment is likely to fall to $386 billion this year. That would be down nearly 30% from just three years ago and the weakest level since the 2008 financial crisis. (Talley, 2017)

- Investors are showing greater caution about higher-risk investments overseas, particularly as the Federal Reserve starts to raise rates and the U.S. economy continues to expand at a faster clip. (Talley, 2017)

- The International Monetary Fund last month downgraded the growth outlook for many emerging markets. (Talley, 2017)

- Although most emerging markets don’t share the same direct trade relationship with the U.S. as Mexico, Mr. Trump’s election has rocked some markets. Investors pulled their capital out of Turkey, Brazil and a host of other industrializing nations in the wake of the president-elect’s win in November. (Talley, 2017)

Source:

http://www.studiofynn.com/journal/points-view-fdi-emerging-markets

https://www.wsj.com/articles/foreign-direct-investment-into-emerging-markets-likely-to-fall-this-year-1486641044?mg=prod/accounts-wsj

https://www.wsj.com/articles/imf-upgrades-u-s-growth-forecast-on-trump-stimulus-plans-1484575451

FDI in emerging markets trend ... down slope by 40% since 2011.

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Define emerging markets?

Which countries constitute as emerging markets?

What are the different types of investments in emerging markets?
1. Market-seeking investments: will focus on countries with large markets and promising growth prospects.
2. Efficiency-seeking investments: countries with attractive labor charges.
3. Extractive investment: driven primarily by the availability of natural resources (hydrocarbons, minerals, precious stones etc.)

Are we assuming that firm’s investment will be categorized as FDI only?

There are global push factors as well country specific pull factors to consider…

Global Push Factors, such as: (availability of Capital/Capital flow)
1. Growth in capital exporting countries: Real income growth in G-7 countries.
2. International liquidity: Average real (ex-post) interest rates in G-7 countries.
3. Risk environment: Natural logarithm of the VIX index to capture the role of global risk appetite.
Emerging Market Countries specific pull/ deterrent factors:
What are the main factors attracting firms to invest in emerging markets?
1. Sound Macro economics:
a. Sustained growth: historical EMC market growth rate (Real GDP, or actual GDP or Natural GDP)
2. Economic/commercial:
a. Market size and growth prospect
i. Size of domestic market measured by GDP, per capita income, or size of the middle class or Log of the PPP-adjusted gross domestic product per capita in the host country.
ii. Current and potential market access
b. Adequate infrastructure (Electricity, Water, Transportation and Telecommunication)
i. Planned investments in infrastructure
ii. Power consumption is indicator of GDP development
c. Skilled labor and its cost
i. Wage-adjusted productivity of labor
ii. Current Education level and future investment in human capital
iii. Living standards Trend (HDI index) (health, life expectancy & education)
d. Reasonable levels of taxation and the overall stability of the tax regime: predictability and stability of the tax system are critical and not as much as tax incentives.
3. Institutional and regulatory factors and policies:
a. Sound Legal framework and the rule of law
i. Enforceability of contracts (abrogation of contracts)
ii. Quality of the bureaucracy
1. World bank (biased, influenced by politics and fluctuates a lot)
2. Heritage foundation more consistent
b. Predictable rules for investment – Certainty
c. Free trade agreements and regional trade integration
What are the main deterrents?
4. Macro economics:
a. Unstable exchange rate: Costs of sustaining hedges on Foreign currency exposure is prohibitively expensive and the risks inevitable in doing business in emerging markets
b. Exchange rate classification: exchange rate volatility and flexibility can affect capital inflows. IMF’s classifications.
c. Inflation Rate
5. Economic/commercial:
a. Projects fail to return economic profit
b. Political Insurance (Risk against political instability) risk premium
c. Corporate Tax Rates: Taxation of corporate income is available from KPMG’s and IMF’s Fiscal Affairs Department’s database.
d. Inequality
i. Gini index
ii. Income distribution
6. Institutional and regulatory factors and policies:
a. Corruption (transparency.org/cpi)
b. Trade barriers/Tariffs : tariff rates, Number of Trade arbitration disputes
c. Political risk ratings published by ICRG. Based on Legal rights, Contract enforcement, Protection of investor rights, Political stability, Internal and external conflicts and Economic prospects of the host economy.
d. Restrictions in capital account transactions related to FDI: Two indicators that exist in the AREAR database of IMF to account for the effects of 1) restrictions on FDI inflows 2) controls on liquidation of direct investment
e. Domestic conflict and Political/Geopolitical instability
i. Fragile states index, fund for peace.org
ii. Conflicts, revolutions and labor strikes based on events: Four domestic conflict event variables (General strikes, Major government crises, Revolutions and Anti-government demonstrations) from the Cross-National Time-Series Data Archive (CNTS).
f. Violations of Intellectual Property Rights




How have these been changing in recent years?

1. FDI Trends in Emerging Market Countries (EMCs)
2. Exports to GDP: Share of exports to GDP (export) in EMC
3. Investment prospects for Emerging Markets differ, depending on both the regional and sectoral focus of investors.
4. FDI in EMCs is increasingly being undertaken to service domestic demand in the host country rather than to tap cheap labor. Going forward, the focus of many companies will be to invest in countries with large markets and promising growth prospects. Need to be proven with supporting data!
a. Consumption growth, income growth etc.
5. Do we cover growth in developed nations as well as emerging nations and compare the two? Why?
a. Are we assuming that investment in the developed nations is not as lucrative as emerging markets?

Team

Please proof read our work from political angle. Institutional angle is under production

[b]a. What are main factors attracting firms to invest in emerging markets and what are the main deterrents? From Political Angle.[u][/b]

When firms looking to expand into emerging markets, one of the key aspect they consider is the political climate, a stable governance with lack of violence would off course score better, as a ground for investment, than a high potential for economic growth market with unstable political climate. Market with more violence are less attractive than those with less violence due to the high risk and related cost like insurance etc.. . While FDI from emerging market are generally in an advantageous position to tackle more fluid situations to transparency in business regulation than FDI from developed economy due to the fact that they had emerged from markets where business climate is adverse, when it comes to political unrest and stability, both developed and emerging markets investors are not indifferent1.

For a firm to conduct business efficiently, markets with enforced law and order are paramount. Political instability can put a huge stress on law and order situation wherein it can put pressure on firm’s performance. Firms from developed nations had exposed to stable governance and regulatory body which had helped them in developing sound strategy for long term planning and financial forecast. Whereas in the emerging market they are faced with more fluid situation which unless an organization is flexible enough to accommodate frequent policy change they are bound to face problems. Results from a world bank research1 quotes “Political risk is more of a deterrent for non-investors than for potential and actual investors. While only 4 percent of actual investors ranked political risk as their top concern, when we asked potential investors and non-investors this number rose to 8 and 17 percent, respectively. Almost half of non-investors said that political risk was one of the two main location factors they looked at when considering a host market”.

The table one shows that the political risk ranks second to macro economics instability. The World Investment and Political Risk (WIPR) 2013 further quotes “The persistent global economic uncertainty appears to have tainted the overall mood, with economic pessimism underpinning the expected stagnant FDI levels. Against this backdrop, the survey continues to find political risk to be a significant concern for investors operating in developing markets”. World bank indicators suggest that emerging economies often do poorly – relative to OECD - in terms of; Accountability of government, competitiveness of press, political stability, lack of violence, policy making and public service delivery2. World bank surveys1 also show that some firms are more risk-averse than others. It’s the more export-oriented companies, and those from India and South Korea, that care most about political risk. This is reasonable considering these firms are often part of international production networks and face greater costs of unexpected changes in regulations that may disrupt just-in-time, just-in-sequence processes.

Hello everyone,

I am posting this here, it is my initial draft for part A. 1. What are main factors attracting firms to invest in emerging markets "Economic Factors".

Hi Mohamed

Good progress, i am reading it and will get back to you.

Is it a joint work by you and Sandra?

I believe each team will put up 900 words

Hello RV,

I did 800 words, Sandra will review the file and make any necessary adjustments/additions before posting it for final review for you guys.

Nirari,

Bro do you need any help?   Please feel free to ask us to gather information or lookup resources, 1800 words is a challenge if you will do it all on your own.

I attached some good documents I found online I think you might find them useful.

Please don't hesitate to ask for assistance.

Hi Mohamed

Read your essay, well done, we should be able to summarize well with lot of good point, just found one typo, corrected.

Attached

Thanks RV

EMCs FDI inflow trends...

I have quite a few questions to clarify, look forward to our discussion tomorrow.

I am not sure I am on the right track here but my input so far but my thoughts are attached.

Hello team,

Attached file from Sandra please review.

Hi guys,

Just thought to share this with you all. Trust you are all doing great? Back in Lagos now and at work. Speak to you all on Thursday.

Hello Team,

Here is the revised draft, I am adding it in a Word file so you may edit/comment/or reply to the notes.

I am still communicating with Sandra concerning some points so If we endup having an updated draft by tomorrow I will re-post it here.

Regards,
Mohammed

Hi

Tried to integrate Sandra work and Nirari suggestion. Pls. review and comment

Thanks RV

Latest draft attached.  I will review your document and get back to you.

This is the second revision of the emerging market trends that impacted FDI inflow.

Hi Yetunda

Please work with the attached version

Hi Nirari

Gone through the page 99 and other relevant pages on UNCTAD, can't connect any thing to political on page 98 and 99. I suggest let Yetunda together our work, we will then add if necessary.

Team

Uploaded the conclusion for politcal

Hello team,

Conclusion for economic factors attracting firms is attached.

Regards,
Mohammed

Hi guys. Just wanted to share this 'almost done' version so that we can have some conversation around it tomorrow. I will complete the portion speaking to new trends tomorrow and try to update before the meeting.