Economics, Management, and Financial Markets Volume 6(1), 2011, pp. 8–18, ISSN 1842-3191

GUEST EDITORIAL 

RISE OF EMERGING ECONOMIES: AN INTRODUCTION JAYA PRAKASH PRADHAN Central University of Karnataka and Sardar Patel Institute of Economic & Social Research [email protected] GEORGE LAZAROIU Addleton Academic Publishers, New York [email protected]

ABSTRACT. This editorial introduction provides an overview of different topics related to the rise of emerging economies explored and analyzed in the present EMFM special issue. As the world becomes even more dependent upon emerging economies for markets and growth, the latter’s economic and political stake in the global affairs can only grow over time. As the economic influence of these economies reaches developed economies directly through exports and outward investments by emerging enterprises, they raised academic and policy concerns in host countries. It is expected that informed analysis of emerging economies presented in the special issue shall usefully contribute to the existing knowledge. JEL: O50, F23 Keywords: emerging economies, emerging multinationals, BRICs

1. Introduction The transformation of large economies such as Brazil, Russia, India and China (BRICs) from the status of being “developing” into “emerging” during the first decade of the twenty-first century reflects an important phase in the evolution of the world economy. These emerging economies have expanded with remarkably high rate of growth and started playing a significant role in the global power and economy. In the last decade, the emerging BRICs accounted for 36 per cent of world GDP growth and increased its contribution from one-sixth of the world output to almost a quarter in purchasing power 8

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from one-sixth of the world output to almost a quarter in purchasing power parity (PPP) terms (Wilson, Kelston and Ahmed, 2010). The group of largest E7 emerging economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) is predicted to overtake the current G7 economies (France, Germany, Italy, Japan, United Kingdom, United States, and Canada) by 2020 and China could turn out to be bigger than the US by 2018 (Hawksworth and Tiwari, 2011). Emerging economies are also radically changing the competitive structure and nature of global industries. Along with rapid growth in demand, these emerging economies are offering new business opportunities to developed country firms and attracting growing proportion of world foreign direct investment and trade. The online merchandise trade statistics from the World Trade Organization suggests that the demand growth in BRICs has led to more than doubling of the group’s share in global merchandise imports between 2000 and 2009 from 5.7 per cent to 12.5 per cent. Probably the growing imports by emerging economies provide a bigger export opportunity for developed country firms. Beside, global firms can also access market opportunities in emerging economies through foreign direct investment and it is no wonder that developing and transition economies received more than half of global FDI inflows in 2010 (UNCTAD, 2011). These emerging economies are important sources of both the stability and recovery of economic activities undertaken by firms, industries and economies during the period marred by negative shocks like global economic crisis (World Bank, 2011). Moreover, firms based in emerging economies can compete with developed country firms by exporting to and undertaking FDI in developed region. In the above backdrop, the Economics, Management and Financial Markets (EMFM) has decided to publish a special issue with scholarly analysis of the important role played by emerging economies in the present era of globalization and high risk financial environment. The contributions in this special issue shed lights on a range of diversified themes related to emerging economies like shifts in global power, rise of emerging multinationals, economic performance under the global economic crisis, exporting behaviors of emerging country firms, clustering and technological capabilities, education and debt markets in emerging countries. In what follows, we summarize each of these topics and take a brief look at the contribution made by each paper included in the special issue. 2. Emerging Economies and Global Power In the hegemonic stability model, rules of interaction and world affairs are articulated and controlled by a few dominant countries that are relatively large 9

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in size and growing, possess global technological dominance and undisputed military power. In the absence of such a dominant state, the world economic system shall remain unstable as demonstrated by the 1929 depression which is a result of the British inability and the U.S. reluctance to assume responsibility for stabilizing it (Kindleberger, 1973). However, the 1990s saw disproportionate shift of global power in favor of the U.S. given her superior economic growth, technological and military leadership (Ikenberry, 2001). In such hegemonic models and for a long period, emerging economies were mostly seen as regional powerhouses. Their perceived economic, political, diplomatic and militaristic importance was viewed to be significant at a geographically restricted area of the world. However, their rapid economic growth, swiftly expanding outflows of investments for acquiring overseas resources and rising share in global trade and FDI inflows during the last decade have transcended their influence beyond the region to the global level. In fact, global financial crisis of 2008–2009 has only served to dramatically accelerate the shift in global economic balance of power to the emerging economies (Hulbert, 2011; Hawksworth and Tiwari, 2011). Sören Scholvin in this special issue revisits the issue of global power in the context of the rise of emerging economies. Scholvin’s analysis highlights profound changes in the exercise of global power and structural manifestation of new regionalization with significant implications for the world and regional stability. The academic discourse and theories of power must undergo thematic revision to include emerging economies as distinct sources of global power. At the region level, these emerging economies are ‘giant next door’ and prosperity in the neighboring countries is crucially linked to the growth of the former. At the global level these emerging economies are playing a major role in shaping the world views on trade, investment, environment and peace. For example, BRICs countries are now coordinating themselves over reforms in international institutions, climate and security issues and their three submits over 2009–2011 each time demanded a greater voice and representation of developing economies in international financial institutions and global affairs. Scholvin tends to argue in favor of a united and coordinated approach by emerging economies at the global level while at the regional level he recommends them to devise a predominantly cooperative approach to accommodate interests of their neighbors. Such strategies are likely to be a more effective for emerging economies to enhance their global influence and interests while lonely action by each will be less successful vis-à-vis the established powers. Therefore, the speed of shift in power towards emerging economies would largely depend upon how effectively these economies translate their interactions into actionable joint policies and partnerships. 10

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3. Emerging Africa In the geographical configuration of emerging powers, it is mostly the Asian emerging economies that have received predominant attention in the literature. This is in spite of African countries dominating the list of the world’s fastest growing economies. For instance, as many as six sub-Saharan African economies, namely Angola, Nigeria, Ethiopia, Chad, Mozambique and Rwanda were in the list of the world’s ten fastest-growing economies during 2001– 2010 (Economist, 2011). Moreover the real GDP growth rate of sub-Saharan Africa significantly accelerated to 5.7 per cent in the last decade as compared to just 2.4 per cent over the previous two decades. This growth acceleration in Africa has been found to be wide spread across countries and sectors, including 27 of its 30 largest economies (McKinsey, 2010). Though African economies are relatively smaller in size as compared to their Asian counterparts, without understanding their superior growth performance and rising influence in global markets for natural resources, the state of our knowledge about emerging economies shall remain incomplete. Sanjay Peters’ contribution seeks to extend the present analysis of emerging economies to the hitherto ignored African region. Peters argued that African region is passing through major political, social and economic transformations which deserve greater focus from Western businesses. Declining civil conflicts, greater political stability and direct elections, single-digit inflation, significant fall in foreign debt and budgets deficits, all have contributed to the rise of African region. The rising demand from Asian emerging economies like China and India for energy and mineral resources partly led to the global boom in commodity prices. Higher oil prices and growing Asian resource-seeking outward investments both have greatly contributed to Africa’s higher growth trajectory (Pal, 2010; Economist, 2011). The author acknowledges the importance of attracting foreign investments, formulating national policies to enhance competitiveness of African domestic firms and effective corporate governance for supporting growth in emerging Africa. 4. Global Economic Crisis and Emerging Economies While the global economic crisis proved that growth in emerging markets is not immune to exogenous shocks from the Western countries, it also verified the critical role played these economies in the path of global economic recovery. Buoyant domestic demand and rapid credit growth in key emerging markets like China, India, Indonesia and Turkey and growing intra-regional trade all are leading to revitalization of global economic growth by offsetting 11

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weaker demand from advanced economies (IMF, 2011). Economic growth is predicted to remain robust in G-20 emerging economies in the near future. The study by Jaya Prakash Pradhan investigates into the firm-level outcomes of global economic crisis taking India as a case of emerging economy. The experience of India provides an interesting example on the responsive of emerging firm’s performance to external shocks from developed economies. As compared to the immediate pre-slowdown period, sales and profitability growth rate of Indian manufacturing and information technology (IT) firms fell sharply in the slowdown year. Therefore, the impact of global economic slowdown has been widespread and strongly negative for emerging economy firms and they are rarely decoupled as hypothesized at the starting of financial and economic crisis in the Western countries. There is some evidence, however, that growth setbacks are more for firms that are relatively older in age and less focused on global market. Fauzia Jabeen and Marios I. Katsioloudes briefly review the experience of Emirate of Abu Dhabi during the financial crisis and discuss the recovery condition of Abu Dhabi economy. The case of Abu Dhabi once again underline that the stability in global economy is critical for economic growth in emerging economies. Between 2008 and 2009, Abu Dhabi’s GDP declined by 18 per cent largely due to 34 per cent decline in oil GDP. Deterioration in oil prices following the global crisis appears to have hit hard the oil GDP while non-oil GDP recorded a growth rate of 6 per cent. Contracting GDP in turn led to lower growth rate of Abu Dhabi’s capital formation at 10 per cent in 2009, compared to 18 per cent in 2008. Jabeen and Katsioloudes have rightly identified that the excessive reliance on oil sector for GDP growth is the major limitation of Abu Dhabi model of development and diversification of sectoral sources is important for ensuring a stable growth path for Abu Dhabi. 5. Outward FDI by Emerging Economy Firms The rapid growth of outward FDI undertaken by firms based in emerging economies has emerged as one of the remarkable aspect of the evolution of international production systems in the last decade. Multinational companies from emerging economies are multiplying in numbers and are investing or acquiring assets abroad on a much larger scale than before (UNCTAD, 2006, 2007; Gammeltoft et. al., 2010). These new set of global players are now transforming into non-home region players by having greater sales or capital assets outside their home base (Pradhan and Aggarwal, 2011). A set of four papers in the special issue are devoted to the study of new dimensions of emerging multinationals that are yet to be analyzed in the existing literature. 12

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Pavida Pananond provides pioneering analysis of how emerging multinationals distribute and diffuse functions in their value chains overseas. Building and utilizing a new dataset on Thai multinationals, this paper draws attention to important features of evolving Thai overseas investments. The empirical evidence meticulously collected and analyzed suggests that Thai multinationals with substantial outward FDI activities are mostly from industries whose value chains are globalized across countries, either through a producer- or buyer-driven mechanism. These emerging multinationals appear to be locating operation activities in developing economies of Asia while moving upstream activities like marketing to developed countries in North America and Europe. Neelam Singh focuses on the role of business groups in the rise of emerging multinationals. The case study and exploratory approach shows that the accelerated internationalization process of Tata Motors Limited is unthinkable without its affiliation to the Tata Group. This business group is among most dynamic groups in India to acquire and improve the new technologies, skills and practices. Affiliation to such an established business group has provided significant strength to Tata Motors’ international investments by way of parent group’s managerial, technical and financial resources, brand names and reputation. In his important contribution, Sergey Filippov turns the focus to the technological strategies adopted by emerging multinationals from Russia. The study contends that Russian innovation system is characterized by a fragmented approach to research where investments in education and science are poorly translated into commercial success. Although home country possesses a strong scientific tradition and skilled manpower base, Russian firms for a long period preferred imitative R&D and remained contingent on direct R&D funding from the state. During the last decade, however, Russian companies started getting attentive to their technological strategy. They are now active in doing in-house R&D, sourcing of technologies inside Russia as well as acquisition of technology-intensive companies abroad. Based on the experience of Brazilian emerging multinationals, Glauco Arbix and Luiz Caseiro argued that these emerging multinationals are neither regional players nor gradualist in their path of geographical expansion. The spatial spread of overseas activities of Brazillian multinationals by investment volume and number of subsidiaries clearly shows that these firms possess greater preferenece for new markets beyond South America. Europe and North America turns out to be the most attractive destination for many of these firms’ outward investments than the home regional markets. This led to the inference that emerging multinationals are expanding their presence in the key markets worldwide wherever they find opportunities for rapid growth and technological learning. The Brazillian case is similar to the ex13

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perience of emerging Indian multinationals (Pradhan and Aggarwal, 2011) suggesting that characterization of emerging multinationals as regional players with dominantly regional strategy is no longer valid in the current period. 6. Export Behaviors of Emerging Economy Firms The rapidly growing exports from emerging economies are another medium for their growing global economic influence. Emerging firms are not only aggressive on outward FDI front but also have expanded their export involvements. As a result, BRICs’ share in world merchandise exports has become more than doubled to 14.6 per cent in 2009 from 7 per cent in 2000. Subash Sasidharan and K.J. Joseph have explored if foreign direct investment has any role in the rise of exports from emerging economies. Taking the case of Indian manufacturing sector, they examined if a firm’s affiliation to MNEs affects its probability of exporting. The descriptive statistics on the proportion of exporting firms shows that above 80 per cent of foreign affiliates exported during 1995–2005 whereas the ratio for domestic owned firms is about 50 per cent. This highlights the export promoting role of foreign investments in emerging economies. The econometric analysis suggests that the superior export behavior of foreign affiliates vis-à-vis domestic firms is more discernible in the case of less technology intensive sectors than technology-based manufacturing products. Concentrating on textile and clothing (T&C) industry, Vinoj Abraham and S. K. Sasikumar look at the factors that enable Indian firms to achieve substantial export success. The study indicates that substantial progress in outward orientation of Indian T&C industry actually took place during 1985– 1995 with the liberalization of textile policy regime like removal of capacity restrictions, easy import of textile machinery, elimination of quantitative restrictions and reduction in tariff, permission of FDI, de-reservation for small scale sector and provision of technology modernization funds. In the post ATC (Agreement on Textile and Clothing) period, however, growth rate of Indian T&C exports slowed down considerably to 7.3 per cent per annum between 1995 and 2007 from 16.2 per cent achieved during 1985–95. The authors argued that the low cost and flexible nature of labor in the industry are the two factors that are driving export competitiveness of Indian T&C firms, especially after enforcement of the ATC. Clearly, the cost advantage has been established by the influence of Special Economic Zones and Export Processing Zones, subcontracting, contractualization and feminization of labor, and declining power of trade unions. The econometric exercise undertaken further supports to the contention that Indian T&C firms by and large utilized the low road to competitiveness, namely exploitation of cheap labor. None 14

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of the capital and technology based factors are found to have any significant influence on the export performance of Indian firms. These results raise an important concern about the long term export competitiveness of Indian T&C firms. Therefore, the sustainability of export success of emerging firms depends upon their ability in shaping a broad-based competitive strategy where strengthening of technological and knowledge capabilities are key requirements. 7. The Challenge for Emerging Economies – Fostering Clustering, Innovation and Skills For emerging economies to continue their high growth and improved competitiveness, it is important that they increase investments for enlarging the endowment of educated and skilled workers and must encourage industrial advancement through innovation. As majority of productive units in emerging economies like India are small and medium enterprises (SMEs) and largely located in rural areas, Keshab Das suggests targeting rural clusters as a powerful catalyst for national innovation. These units spread across geographically dispersed rural locations functions with the known disadvantages of inadequate infrastructure, poor endowment of skilled workers and absence of policy support systems. The rationale for clustering of these scale-disadvantage firms is well appreciated in the literature but the focus is more for supporting clusters serving global markets. The author argued that such a selective cluster policy that ignores small firms supplying to sub-national and national markets is an incorrect strategy. The liberalized policy regime has thrown new challenges for rural SMEs which warrant them to make fresh investments in capital goods, new technologies and training. Rural industrial and cluster policy that aims at creating an enabling business environment for the largely informal units and addressing their access to credit and adequate business infrastructure can have significant innovation outcomes. Sonia Ben Slimane explores the role of international alliances and joint ventures (IJVs) in improving the technological capabilities of emerging economy firms. Taking the case of emerging Tunisian firms, the study shows that IJVs have motivated recipient firms to adopt an active learning process and enhance their existing R&D activities. The extent by which recipient firms benefit from IJVs, though, depends on the level of their potential absorptive capacity. Thus, joint ventures can be another useful mode for technological upgrading of emerging economy firms provided they possess higher assimilative and absorbing capacity. Education plays a key role for the supply of skilled labour that is critical for ensuring higher growth and productivity in emerging economies. All the 15

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emerging economies including China and India face challenges of eliminating illiteracy especially in rural areas and encouraging higher education beyond elementary schooling. For them, ensuring spatial availability of education and access to it have become major strategic goals. Sanjeevaiah Puttaswamaiah examines the status of higher education in India from the perspectives of equity and accessibility. Findings suggest that Indian higher education has serious problems of inequity in access over space, gender, religion and social groups. The large gap in the higher education gross enrolment ratio between rural and urban areas, male and female, religious groups and social categories reveals disparity in the functioning of higher education. Further the general low level of enrollment ratio for higher education reflects existence of substantial barriers in accessing it. Puttaswamaiah argues that non affordability is an issue and the role of education loan can be crucial in promoting higher education in India. Since education constitutes a small proportion of total priority sector commercial lending in India, more focus should be given for promoting education loan. 8. Corporate Sector and Debt Markets The functioning of the corporate sector and debt markets in emerging economies can have considerable implications for economic growth. The prevailing market imperfections and uncertainties in emerging economies, firms tend to carry significant amount of liquid assets in their investment portfolios as against the long-term assets. On the other hand, companies in developed economies may prefer relatively lower cash holdings thanks to their robust financial markets. Mohammad Faisal Rizwan and Tariq Javed revisit the issue of corporate cash holdings determinants among emerging firms based on the experience of Pakistani corporate sector. Their results confirmed that firms’ cash holding is positively dependent on firm’s growth and net working capital but negatively related to the leverage. The analysis of the structure of the debt market in India by D. Tripati Rao and Ram Kishan Agrawal reveals interesting features of evolving debt markets in emerging economies like India. Unlike the general situation in other countries where the size of debt market is larger than that of equity market, India represents a special case as her equity market dominates debt market by size. Moreover, Indian debt market is dominated by government securities (G-secs) than corporate bonds. The boom in stock market has led more Indian companies sought fund through initial public offerings, follow on public offerings, rights and preferential issues. Results also suggest that monetary policy shocks through changes in repo and reverse reports are 16

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having significant impact on net market borrowing and key rates (short-term interests, call rates and one year G-secs rate) respectively. 9. Conclusions This special issue has clearly brought out a number of emerging implications of the rise of emerging economies. The scholarly works presented here shift focus to new areas in the study of these emerging global powers and in different ways expect these economies to be both contributor to and beneficiary from global growth. Their rising profile can be useful for improving governance in the exercise of power and internationals institutions and making global industries more competitive and productive. The traditional international trade and production patterns are set for rapid transformation with the rise of global firms based in emerging economies. However, emerging economies have their own set of constraints in improving technological advantages, quality of education and efficiency of financial markets. Many of these challenges require urgent policy attention and strategies to help the growth process embedded in innovation, skills and efficiency. ACKNOWLEDGEMENT We are very much grateful to our distinguished colleagues who acted as anonymous referees for different papers in the EMFM special issue and provided insightful suggestions and comments for improvements. Specifically we are thankful to Aradhna Aggarwal, Vinoj Abraham, Surajit Mazumdar, Andreas Nölke, S. Puttaswamaiah, Pavida Pananond, Geetha Rani, Neelam Singh and Partha Pratim Sahu for their generous supports in the review process.

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Ikenberry, G.J. (2001), “Getting Hegemony Right – Analysis of the United States as a “Hyperpower” Nation,” The National Interest 63: 17–24. IMF (2011), “IMF Note on Global Economic Prospects and Policy Challenges,” prepared for the April 15, 2011 meeting of the Group of Twenty Finance Ministers and Central Bank Governors, Washington, D.C.: International Monetary Fund. Kindleberger, C. (1973), The World in Depression, 1929–39. Berkeley: University of California Press. McKinsey (2010), McKinsey on Africa: A Continent on the Move. New York: McKinsey & Company. Pal, P. (2010), “The Surge in Indian Outbound Foreign Direct Investment to Africa,” in Sauvant, K.P. and J.P. Pradhan, with A. Chatterjee and B. Harley (2010), (eds.), The Rise of Indian Multinationals: Perspectives on Indian Outward Foreign Direct Investment. New York: Palgrave Macmillan, 255–275. Pradhan, J.P. and R. Aggarwal (2011) “On the Globalness of Emerging Multinationals: A Study of Indian MNEs,” Economia e politica industriale: Journal of Industrial and Business Economics 38(1): 163–180. UNCTAD (2006), World Investment Report 2006, FDI from Developing and Transition Economies: Implications for Development. New York-Geneva: United Nations. UNCTAD (2007), Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment. New York-Geneva: United Nations. UNCTAD (2011), “Global and Regional FDI Trends in 2010,” UNCTAD Global Investment Trends Monitor 5. New York-Geneva: United Nations. Wilson, D., A.L. Kelston and S. Ahmed (2010), “Is this the ‘BRICs Decade’?” BRICs Monthly 03. New York: Goldman Sachs Global Economics, Commodities and Strategy Research. World Bank (2011), Global Economic Prospects: Navigating Strong Currents. Washington DC. © Jaya Prakash Pradhan, George Lazaroiu

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