Emerging economies are becoming key players in global business, offering both new opportunities and strategic challenges for companies seeking international growth.
What Are Emerging Economies?
Emerging economies are countries in the process of rapid industrialisation and economic development. While not yet at the level of developed nations in terms of income levels, infrastructure, and institutional stability, these countries are progressing quickly and offer high potential for economic returns. They are characterised by a move from an agriculture-based to an industry- and service-based economy, accompanied by reform in financial systems, increasing foreign direct investment (FDI), and expanding consumer markets.
Key Characteristics of Emerging Economies
Rapid economic growth: These nations typically have higher GDP growth rates compared to developed economies. For example, India has maintained annual growth rates above 6% for many years.
Urbanisation and industrialisation: Increasing numbers of people move to cities, driving demand for housing, infrastructure, and services.
Expanding middle class: A growing segment of the population gains access to disposable income, boosting consumer demand.
Market liberalisation: Gradual removal of trade barriers and deregulation encourages more open economic policies.
Volatile but promising markets: While growth potential is high, political and economic instability can pose serious risks.
Examples of Emerging Economies
BRICS countries: Brazil, Russia, India, China, South Africa – often seen as the leading group of emerging economies due to their size and influence.
MINT countries: Mexico, Indonesia, Nigeria, Turkey – identified for their strong demographic potential and strategic global positions.
Other countries often classified as emerging markets include Vietnam, Philippines, Malaysia, Bangladesh, Colombia, and Kenya.
These nations are of increasing interest to international businesses due to their population sizes, natural resources, and growing consumer bases.
Why Emerging Economies Matter to Businesses
High Growth Potential
Emerging economies represent some of the fastest-growing regions globally. Their strong growth potential is driven by:
Increased productivity and investment: Investment in infrastructure, education, and healthcare promotes long-term economic performance.
Young populations: Countries like Nigeria and India have median ages under 30, ensuring a long-term workforce and consumer base.
Technological adoption: Although not all have advanced infrastructure, mobile and internet penetration is rapidly expanding.
For businesses, this means a chance to capitalise on rising demand, develop brand loyalty early, and take advantage of less-saturated markets compared to mature economies.
Large and Expanding Consumer Markets
Population growth and income development are key drivers of expanding consumption:
China and India together represent over one-third of the global population.
The urban middle class is expected to double in size in many emerging nations over the next decade.
As more people move into urban centres, demand for retail goods, financial services, housing, healthcare, and education rises significantly.
For example, the fast-food industry in India is expected to grow at a compound annual growth rate (CAGR) of over 10%, as urban consumers seek affordable and convenient food options.
Lower Production Costs
A major incentive for international businesses to invest in emerging economies is the availability of cost-effective labour and resources:
Wages are significantly lower than in Western nations – for instance, average manufacturing wages in Vietnam are roughly one-tenth of those in the United States.
Raw materials such as rare earth metals, oil, and agricultural goods are often more accessible.
Favourable tax policies and government incentives are common, particularly in special economic zones (SEZs) or free-trade areas.
The result is improved profit margins and global cost competitiveness, especially for manufacturing and labour-intensive industries.
Strategic Opportunities in Emerging Economies
International Market Expansion
For many firms, emerging markets offer the best prospects for geographic expansion:
Developed markets are often saturated, with limited room for growth.
Emerging economies allow companies to grow their customer base, develop new revenue streams, and diversify their market exposure.
Firms entering early may benefit from a first-mover advantage, establishing a loyal consumer base before competition intensifies.
Global Sourcing and Supply Chain Efficiency
Many businesses use emerging economies as sourcing hubs:
Outsourcing production or services to lower-cost countries can reduce operational expenses.
Firms like Nike and Adidas manufacture large quantities of goods in Southeast Asia, taking advantage of local infrastructure, labour, and favourable trade policies.
Business Process Outsourcing (BPO) to countries like the Philippines and India helps reduce costs for services such as customer support, IT, and accounting.
Investment and Joint Ventures
Emerging markets offer opportunities for:
Greenfield investment – building new facilities from scratch in a new country.
Mergers and acquisitions – buying or merging with local firms to gain instant market access.
Joint ventures – partnering with local firms to share resources and risks, and to navigate cultural and regulatory challenges.
Product Innovation and Local Adaptation
These economies encourage businesses to innovate for affordability and relevance:
Products are often redesigned to meet lower price points or local preferences.
For example, Unilever sells sachet-sized shampoos and soaps in India and Nigeria, allowing low-income consumers to purchase products in smaller, more affordable quantities.
Strategic Risks and Challenges
Political and Regulatory Uncertainty
Businesses must be wary of:
Policy volatility: Shifting trade policies, nationalisation of industries, or new regulations can affect profitability.
Corruption and weak legal systems: Difficulty in enforcing contracts, protecting intellectual property, or resolving disputes can increase risk.
Regulatory complexity: Different provinces or regions may have conflicting regulations.
For instance, in Russia, state interference and political tensions have led to sanctions affecting foreign investment. Similarly, in Brazil, bureaucratic delays can hinder the launch of new business operations.
Currency Instability
Exchange rate fluctuations can affect revenues and operating costs:
A weak local currency may reduce repatriated profits.
Currency devaluations can lead to unexpected cost increases or inventory losses.
Businesses often use hedging strategies, such as forward contracts or options, to mitigate these risks.
For example, if a UK-based company exports goods to Brazil and the Brazilian real depreciates against the pound, the firm's revenue in pounds would decrease, even if local sales remain strong.
Infrastructure Limitations
Many emerging markets face issues related to transport, energy, and technology:
Roads, ports, and airports may be underdeveloped, causing delays and increased costs.
Power outages and limited broadband access can hinder operations.
Poor logistics may lead to stockouts, supply chain inefficiencies, and increased inventory costs.
A business planning to manufacture goods in Nigeria, for example, may have to invest in backup generators and private transport networks due to infrastructure challenges.
Cultural and Linguistic Barriers
Operating in unfamiliar cultural environments introduces additional complexity:
Consumer preferences and purchasing behaviours vary widely between cultures.
Miscommunications due to language differences can affect branding, marketing, and negotiations.
Companies must train local staff, translate materials accurately, and often hire local managers with an understanding of the market.
A famous example is Pepsi's slogan “Come alive with the Pepsi generation”, which was reportedly mistranslated in China as “Pepsi brings your ancestors back from the grave” – damaging brand perception.
Competition from Local Firms
In many emerging markets, domestic companies have:
Deep market knowledge and local relationships.
Faster decision-making and adaptability.
Government support in the form of subsidies or contracts.
International businesses may find themselves competing not only with global rivals but also well-established local players who understand consumer behaviour and can offer tailored products.
Case Studies: Firms Engaging with Emerging Economies
Apple in India and China
Apple sources many of its components and assembles its products in China through Foxconn, taking advantage of skilled labour and economies of scale.
In India, Apple has expanded retail operations and begun local manufacturing to reduce import tariffs and appeal to middle-class consumers.
Unilever in Africa and Asia
Generates over 60% of revenue from emerging markets.
Adapts products and pricing strategies for affordability.
Works closely with local suppliers and distributors to improve reach and trust.
Volkswagen in China and Brazil
Operates manufacturing plants in both countries.
Local production allows for tariff avoidance, cost savings, and faster delivery.
Developed China-specific models to meet local tastes and environmental regulations.
Tata Group (India)
Acquired Jaguar Land Rover, establishing itself as a global automotive leader.
Tata Motors exports affordable vehicles to markets across Africa and Asia.
Represents a trend of emerging market firms becoming global multinationals.
Lenovo (China)
Acquired IBM’s personal computer division in 2005.
Now one of the world’s largest PC manufacturers, selling products globally.
Operates R&D centres and factories in China, the USA, and Europe.
These examples highlight the bidirectional nature of globalisation – developed-world firms enter emerging economies to access growth and cost advantages, while emerging market firms are also expanding internationally.
Strategic Considerations When Entering Emerging Economies
Market Research and Risk Assessment
Businesses should assess political stability, economic outlook, and regulatory environment before entering a new market.
Consider using tools such as PESTLE analysis (Political, Economic, Social, Technological, Legal, Environmental) to guide decision-making.
Choosing the Right Entry Strategy
Exporting may be suitable for low-risk market testing.
Licensing or franchising allows for fast expansion with less capital.
Joint ventures provide local expertise and cultural insight.
Direct investment (FDI) offers high control but increases risk and cost.
The best method depends on business size, experience, resources, and strategic goals.
Long-Term Commitment and Localisation
Success often depends on adapting to local preferences – from product features to payment methods.
Building trust with local consumers, suppliers, and authorities is crucial.
Firms must be willing to invest in infrastructure, people, and community engagement for long-term growth.
FAQ
Governments in emerging economies actively encourage FDI to accelerate economic development, create employment, and transfer technology and expertise. They often offer tax incentives, reduced tariffs, and infrastructure support to attract multinational firms. FDI brings in capital that supports industrial growth, improves balance of payments, and modernises sectors like manufacturing and services. It also enhances competition and productivity by exposing domestic firms to international standards. These benefits help governments achieve macroeconomic goals like poverty reduction and sustained GDP growth.
Political instability can disrupt business operations through sudden regulatory changes, nationalisation of assets, or civil unrest. These conditions create uncertainty, reducing investor confidence and making long-term planning difficult. Firms may face difficulties repatriating profits, securing legal protection, or maintaining supply chains. Currency devaluation and trade restrictions often accompany political turmoil, affecting input costs and market access. As a result, businesses must implement strong risk assessments and develop contingency plans, including insurance, diversification, and partnerships with stable local firms.
Infrastructure is a key determinant in attracting multinationals, as efficient transport, energy, and communication systems reduce operational costs and delays. Well-developed ports, roads, and logistics networks enable smoother supply chain management and faster delivery to consumers. Reliable electricity and internet access support manufacturing and service activities. Emerging economies with better infrastructure are more competitive globally, offering fewer disruptions and improved productivity. Consequently, many governments prioritise infrastructure investment or public-private partnerships to enhance their appeal to foreign investors.
Cultural norms in emerging markets significantly influence leadership styles, decision-making, and employee relations. For instance, hierarchical societies may prefer top-down management, while collectivist cultures value group harmony over individual achievement. Understanding local work ethics, communication styles, and attitudes towards authority helps firms manage staff effectively. Ignoring cultural context can lead to high turnover, poor morale, or miscommunication. Multinational firms often employ local managers or invest in cultural training to adapt their practices and build strong, respectful relationships.
Emerging economies enable businesses to diversify supply chains by offering alternative sources of labour, raw materials, and manufacturing capacity. This reduces reliance on a single country or region, enhancing resilience against disruptions like natural disasters, political conflicts, or pandemics. Sourcing from multiple emerging markets also provides cost advantages and access to unique resources. Moreover, having production spread across regions helps firms respond quickly to local demand and comply with regional trade regulations, making supply chains more flexible and competitive.
Practice Questions
Analyse the strategic benefits and risks for a UK-based manufacturing business entering an emerging economy such as Vietnam. (10 marks)
Entering an emerging economy like Vietnam offers strategic benefits including lower production costs, access to a growing consumer market, and potential for increased profitability. Labour costs are significantly lower than in the UK, improving margins. Vietnam’s rapid economic growth also presents long-term expansion opportunities. However, risks include political instability, fluctuating exchange rates, and weak legal protections for intellectual property. Infrastructure limitations and cultural differences could further complicate operations. Effective risk management strategies, such as forming joint ventures with local partners and currency hedging, are essential to balance opportunity with operational uncertainty and ensure sustainable international success.
Explain how a growing middle class in emerging economies can influence the marketing strategy of multinational firms. (10 marks)
A growing middle class increases demand for higher quality, affordable goods, influencing firms to adapt product design, pricing, and promotion strategies. Multinationals may develop localised products tailored to consumer tastes and income levels, such as sachet-sized items or region-specific flavours. Pricing strategies often focus on affordability while maintaining perceived value. Promotional efforts may use local languages, influencers, and culturally relevant messaging to build brand loyalty. This demographic shift encourages firms to segment markets more precisely and invest in long-term brand-building, allowing them to establish a strong foothold and benefit from the increasing purchasing power of emerging market consumers.
