A discussion on the advantages and disadvantages of investing in emerging markets

A discussion on the advantages and disadvantages of investing in emerging markets

Introduction:

Emerging Markets refers to a group of developing nations that experiences less economic or infrastructural development than developed nations. Due to globalisation, emerging markets have become a centre of attraction from an investor across the globe. Developing economies have adopted various liberalisation measures and open their market for foreign direct investment and trade. Emerging markets Over the year, emerging markets have experienced a significant increase in investment as it offers growth, diversification, and high return on investment. At the same time, the instability of political, social, legal, and economic factors of developing countries imposes a risk associated with an investment in an emerging market. However, emerging markets are the world’s fastest-growing economies and play a vital role in the expansion of global trade growth. Thus, it is predicted that the majority of the global economic growth will occur in emerging markets. This paper will discuss the benefits of investing in emerging markets and examine trends and issues related to investing in emerging markets.

Overview of investment in emerging markets:

According to the economist from the world bank, the term emerging markets refer to the market activities of countries that experiences the transition from developing to developed. Globalisation has increased each country’s political, economic, and cultural aspects to become less independent, which has made it easier for firms and investors to approach the emerging market (Guttal, 2007). These countries offer a wide range of opportunities in trading, Foreign direct investment, transfer of the latest technology via open door policy. The emerging market is still in the developing phase, so investors can gain exposer to local resources, workforce availability, and the intervention of traditional regulations that helps to achieve sustainable economic growth. Therefore, countries seeking foreign investment must establish a business environment that reassures the expectations of global investors. At a time, developing countries were identified as the risky market now experiencing rapid growth and turned into emerging markets. Even though emerging markets are identified as unpredictable, they are considered the most attractive investment of high growth opportunities (Amenc et al., 2002). Despite the volatility of emerging markets, the highest growth and return on stocks are available in the fastest-growing economies. Likewise, the advance the institutional environment in the country more foreign investment it attracts (Globerman and Shapiro, 2003). Apart from Foreign direct investment, private enterprises, greenfield programs, infrastructure development, multinationals corporations have experience growth in investment. There is increasing interest in conditions surrounding privatisation and foreign investment in emerging markets from both the governmental perspective (Ramamurti, 2000; Zahra et al., 2000) and from the perspective of local and multinational corporations seeking to take advantage of opportunities emerging from the governmental market liberalization (Doh, 2000; Hoskisson et al., 2000).

Primary Advantages and Disadvantages of Investing in Emerging Market:

Advantages:

The impact of privatisation and market liberalisation has experience impeccable investment flows in emerging economies. First of all, many international firms gain the opportunity to enhance their product life cycle by shifting their manufacturing unit to developing countries as such countries provide low-cost operations. Also, it will support employability and improve living standards in the local region. Investors can access the benefits of cheap labour, comparatively fewer charges of land and production, availability of local resources. Th extend of diversification allows investors to enter an emerging market in new different segments helps investors boost profitability among competitors. In Addition, the introduction of public-private partnership opportunities is advantageous for investors as it limits the trade barriers. Likewise, joint ventures with local government firms reduce the risk of downfall. Further, other benefits of an emerging market are risk management and improved financial performance as it gives international recognition entering into the worldwide market. Overall, investing in an emerging market can generate a substantial return on the portfolio.

Disadvantages:

The major challenge for investing in the emerging market lies in the stability of the political factors of host countries. The political instability in developing countries keeps updating trade and investing regulations and policies, which directly impacts the inflows and outflows of capital income by the government. The Currency rate fluctuatio