Emerging markets

Definition

Emerging markets are economies that are in the process of rapid growth and industrialization, characterized by increased foreign investment, higher economic volatility, and evolving financial systems. These markets often show potential for substantial growth due to factors like improving infrastructure, a growing middle class, and greater integration into the global economy. However, they also present unique risks related to political instability, currency fluctuations, and market inefficiencies.

5 Must Know Facts For Your Next Test

1. Emerging markets are often characterized by lower per capita income compared to developed countries but show potential for rapid economic growth.
2. These markets typically attract foreign investment due to the potential for higher returns compared to mature markets, but they come with increased risk exposure.
3. Economic policies in emerging markets can be influenced heavily by political changes, which can lead to sudden shifts in market conditions.
4. Emerging markets are becoming increasingly integrated into global trade networks, making their economies more susceptible to global economic trends and crises.
5. Investing in emerging markets often requires a tailored risk management approach to navigate challenges such as liquidity constraints and less established legal frameworks.

Review Questions

• Discuss how the characteristics of emerging markets influence international risk management strategies.
  • Emerging markets possess distinct characteristics such as higher economic volatility and political risks that significantly influence international risk management strategies. Companies operating in these markets must assess factors like currency fluctuations and political instability, leading to the need for tailored risk mitigation approaches. This may involve using hedging techniques or diversifying investments across multiple emerging economies to balance risk exposure.
• Evaluate the impact of foreign direct investment on the growth trajectory of emerging markets.
  • Foreign direct investment plays a crucial role in the growth trajectory of emerging markets by providing essential capital, technology transfer, and access to global markets. These investments help boost local economies by creating jobs and improving infrastructure, ultimately contributing to economic development. However, reliance on foreign investment can also pose risks if investors withdraw capital during periods of instability or downturns, highlighting the need for robust economic policies.
• Analyze the implications of increased integration of emerging markets into the global economy on capital budgeting decisions for multinational corporations.
  • The increased integration of emerging markets into the global economy has significant implications for capital budgeting decisions made by multinational corporations. As these markets grow and evolve, they offer new opportunities for investment with potentially high returns. However, this also requires firms to account for additional risks such as fluctuating exchange rates and changing regulatory environments. Multinational corporations must carefully analyze projected cash flows and apply sensitivity analysis to ensure that their capital budgeting processes effectively incorporate both potential gains and risks associated with investing in these dynamic economies.

Related terms

foreign direct investment: Investment made by a company or individual in one country in business interests in another country, typically through the establishment of business operations or acquiring assets.

capital flight: The large-scale exit of financial assets from a country due to economic or political instability, which can significantly impact emerging markets.

market volatility:

The rate at which the price of securities increases or decreases for a given set of returns, often more pronounced in emerging markets due to their developing nature.