The Internet – that provides the convenience of sending information to any part of the world. Lastly Software Manufacturing – which has made everyone’s computer interoperable. Convergence of these technologies have made economies which were once underscored as “Third World Economies” as the emerging hubs for International Business. However these economies are faced with new challenges when competing globally, such as lack of infrastructure, quality in education and corporate governance.
The challenges that showcase their weakness can be an investment opportunity, thus making them viable markets worth venturing into. Objective: Our study focuses on the significance and impact of new markets in international trade on countries, companies and also on individuals. This study will also aim at understanding the trade problems faced by them in this area and to propose ways and measures to tackle them. Methodology: Our methodology comprises of information search, observations, questionnaires and opinion interviews with industrial experts and faculties.
Various statistical measures will also be used to analyse the data. Outcome of the research: Through this study, we intend to bring out the different roles of emerging markets in international trade. These measures are taken via questionnaires; opinion of industrial experts, faculties specialized in international business and pre dominantly from few exporters who focus on international trade. We believe that the outcome of this study will help the corporate and individuals to prepare themselves to overcome the problems they are facing in the emerging battlegrounds of international trade.
INTRODUCTION: The term “emerging markets” is used to describe a nation's social or business activity in the process of rapid growth and industrialization. The Center for Knowledge Societies defines Emerging Economies as those "regions of the world that are experiencing rapid informationalization under conditions of limited or partial industrialization. " Currently, there are approximately 28 emerging markets in the world, the largest being those of India and China. Examples of other emerging markets include Argentina, Brazil, Chile, Mexico, Russia, some Arab Gulf States and South Africa.
The rapid integration into world markets by six of the largest non-OECD (Organization for Economic Co-operation and Development) economies (Brazil, Russia, India, Indonesia, China and South Africa, together known as the BRIICS) was an important component of globalisation during the past two decades. Economic incentives across world markets and in the BRIICS in particular, have been aligned more closely with countries’ and businesses’ genuine strengths. From the past few decades, all of the BRIICS have opened their economies significantly and improved their connectedness to world trade networks.
The substantial reduction of trade barriers at the border can be seen, for example, in the decline of the average applied tariffs on non-agricultural products. However, the pace varied across these countries. Dispersion of tariffs also fell, contributing to a further reduction in economic distortion. However, in this study we focus on the emerging engines in the Asian Business – India and China, which together accounts for 2. 5 billion people, China and India are today the driving forces of growth in the midst of rapid economic transformation in the global economy.
The Composite Leading Indicators (CLI) designed to provide early signals of turning points in business cycles, rose by 0. 4 point for India in April 2009, and 0. 9 for China. For much of human history, what China and India had in common was the fact that they were the richest nations on earth. Long before Europe emerged, China and India had higher standards of living and more numerous technical and scientific inventions. Yet starting in the early nineteenth century this began to dramatically change with both countries experiencing a long relative decline, eclipsed ultimately by Europe and North America.
By mid twentieth century, both countries were relatively poor. The reversal of China’s fortunes began in 1978 when Deng Xiao Ping came to power and instituted market oriented economic policies and that of India began in the early 1990s when, in response to a financial crisis, the government reversed decades of socialistic policies and began a gradual path toward market orientation. Since those policy reversals, both countries have grown rapidly. For the first time since the early nineteenth century, they have expanded their share of global GDP. [pic]
Figure 1: Global GDP share expressed as a percentage from 1600-2001 for the key players in global economy. Global investment firm, Moody’s say that driven by renewed growth in India and China, the world economy is beginning to recover from one of the worst economic downturns in decades. The Chinese GDP has risen by 7. 9 per cent while that of India has grown by 6. 1 per cent in the April-June 2009-10 periods. Moody’s has now revised India’s growth forecast to 6. 4 per cent for the current fiscal. FACTORS AFFECTING CHINA’S GROWTH: International trade makes up a sizeable portion of China's overall economy.
The course of China's foreign trade has experienced considerable transformations since the early 1950s. In 1950 more than 70 percent of the total trade was with non-Communist countries, but by 1954, a year after the end of the Korean War, the situation was completely reversed, and trade with Communist countries stood at about 75 percent. POLITICAL REFORMS The Chinese Economy was on the forefront of economic greatness under the periods of Mao Zedong from 1949 – 1978 who introduced the “Great Leap Forward” under this economy, the country was a centrally planned economy.
Though this idea of planned economy was inculcated in the economy, the intervention of state in agriculture led to massive corruption, ultimately leading to the deaths of millions of people due to starvation. Market Oriented Mixed Economy: This led to a period rule under Deng Xiaoping , who introduced the “market oriented mixed economy”-based on private property . Under this system China saw much growth in both national and international trade. Farmlands were privatized and agriculture was now a concern of both the state and the individual.
A market economy is an economy based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand. This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are also contrasted with mixed economy where the price system is not entirely free but under some government control or are heavily regulated and may sometimes be combined with state-led economic planning. SOCIAL REFORMS:
Another area which is pivotal in the area of growth is the social and cultural condition which is important to enhance the growth. One Child Policy: This is a measure which was started in China to curb the population explosion in China. China’s one child family policy, which was first announced in 1979, has remained in place despite the extraordinary political and social changes that have occurred over the past two decades. It emerged from the belief that development would be compromised by rapid population growth and that the sheer size of China’s population together with its young age structure presented a unique challenge.
Most population growth rate targets were abandoned in the early 1980s, and from 1985 the official goal was to keep the population at around 1. 2 billion by 2000. Protection for Private Property Rights: Prior to 1978, private ownership of property was not encouraged at any cost. However later the government started to proportionate and distribute private property. Harmonious Society: This is a socio-economic vision that is said to be the ultimate end result of Chinese leader Hu Jintao's signature ideology of the Scientific Development Concept.
It serves as the ultimate goal for the ruling Communist Party of China along with Xiaokang society, which aims for a "basically well-off" middle-class oriented society. First proposed by the Chinese government under the Hu-Wen Administration during the 2005 National People's Congress, the idea changed China's focus from economic growth to overall societal balance and harmony. Grasping the Large and Letting the Small Go Policy: These reforms (1996) included efforts to corporatize state-owned enterprises (SOEs) and to downsize the state sector.
The “grasping the large” component indicated that policy-makers should focus on maintaining state control over the largest state-owned enterprises (which tended to be controlled by the central government). “Letting the small go” meant that the central government should relinquish control over smaller state-owned enterprises. Relinquishing control over these enterprises took a variety of forms: giving local governments authority to restructure the firms, privatizing them, or shutting them down. ECONOMIC REFORMS:
One of the main factors which contributed to the economic growth of China was the Economic liberalization which was started in 1978. Its economy changed into a market oriented mixed economy. They implemented several instruments to increase their economic growth. Special Economic Zones (SEZ’s): China was the first country to introduce SEZ’s and they followed a western style of management which resulted in survival of best in the market. It is a geographical region that has economic laws that are more liberal than a country's typical economic laws.
The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of a structure is to increase foreign direct investment by foreign investors. Special Economic Zones were founded by the central government under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years.
Five Year Plans: The economy was shaped by the Chinese Communist Party through the plenary sessions of the Central Committee and national congresses. The party plays a leading role in establishing the foundations and principles of Chinese communism, mapping strategies for economic development, setting growth targets, and launching reforms. Planning is a key characteristic of centralized, communist economies, and one plan established for the entire country normally contains detailed economic development guidelines for all its regions.
China is in its 11th Five year plan guideline (2006-2010) Private Ownership: With production being introduced in the agricultural sector, private ownership of production assets became legal, although many major non-agricultural and industrial facilities were still state-owned and centrally planned. The government also encouraged non-agricultural activities, such as village enterprises in rural areas, promoted more self-management for state-owned enterprises, increased competition in the marketplace and facilitated direct contact between Chinese and foreign trading enterprises.
The development of the private sector was allowed and was permitted to compete with state firms in a number of service sectors, and increasingly in infrastructure operations, such as construction. Foreign direct Investment: China has principal attractions like low-cost labor and an enormous domestic market of more than 1. 2 billion consumers. The investment climate has been opened up gradually. In the 1980s, foreigners were restricted to export-oriented joint ventures with Chinese firms.
In the early 1990s, they were allowed to manufacture goods for sale in the domestic Chinese market; and by the mid-1990s; the establishment of wholly foreign-owned enterprises was permitted. China's accession to the WTO forces the government to open up the services sector. In 2004, China being one of the fastest-growing economies in the world attracted actual FDI of more than US$60. 6 billion, up 13 per cent from the previous year. As of 2009, China has around US$ 80 billion alone-the highest FDI in the world.
Chinese economic stimulus plan: The stimulus package announced by the central government of the People's Republic of China on 9 November 2008 was its biggest move to stop the global financial crisis from hitting the world's third largest economy. The State Council had approved a plan to invest 4 trillion Yuan in infrastructure and social welfare by the end of 2010. The stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education, environment, industry, disaster rebuilding, income-building, tax cuts and finance.
Export Driven Economy: China’s export was US $0. 30 trillion higher than its imports. The country mainly drives the economy through its exports. It also had a healthy Foreign Exchange Reserve of US $ 2. 1 trillion and is the 3rd largest GDP with $4. 4 trillion. Government Owned Banks: One of the reasons that China was able to drive its economy through exports was because of the efficient controlling of the money supply by the banks, even in the midst of recession. China has not let its banking system run roughshod over its productive economy.
Chinese banks work for the people rather than the reverse. China hasn’t allowed its banking sector to become so powerful, so influential, and so large that it can call the shots or highjack the bailout. In simple terms, the government preferred to answer to its people and put their interests first before any vested interest or group. And that is why Chinese banks are lending to the people and their businesses in record numbers. The Chinese stimulus was large compared to the U. S. and has been much more effectively channeled into employment than that in the U. S.
Manufacturing as a low-cost producer: China is well known for its low cost products. The production rates of electronics and other goods are the lowest in China when compared to other countries, which is mainly because of the low cost of production by the manufacturer. The methods used in production such as poke-yoke (error free) have helped them to attain low costs in production. Another reason for low cost production is the cheap labor available in China. Infrastructure: The infrastructure facilities provided by government to the companies contributed immensely to their growth.
The period since 1978 saw rapid industrialization from 53% in 1981 to 8% in 2001. FACTORS AFFECTING INDIA’S GROWTH POLITICAL REFORMS: India celebrated 60 years of Independence on August 15, 2007. It is now the second fastest growing major economy, after China. It has also caught media attention because companies like Tata Steel acquired Corus; India is now the second largest investor by number of projects in London; and Mr. L. N. Mittal - an Indian - owns the largest steel company in the world.
Visionary Leaders: It all began in 1947, the year of Independence, where India’s first prime minister Pundit Jawaharlal Nehru chose Democracy which was modeled on Westminster. The Soviet Union however presented an economic model that appealed in terms of growth. The Planned Economy: Self - sufficiency and fear of economic dependence on foreigners after two centuries of overseas rule shaped early thinking at Independence. Nehru modeled the economy on Soviet socialist lines of central control and state-run heavy-industry firms dominating the economy to avoid reliance on the West.
The License Raj: During the 1950-1990, in order to promote self sufficiency policies of high import tariffs and duties, controls on production through licenses, public sector monopolies and isolating India to the outside world were followed. The unintended results were a shackled economy. Poor economic growth resulted due to the economy stifled by licensing, socialist red tape, excessive bureaucracy and regulation (“the License Raj”). Many state run monopolies were run by bureaucrats with little commercial experience. Corruption was nurtured.
Private industry was starved of badly needed funds that went to state-run firms, often loss makers. The result was the poor allocation of scarce resources to unproductive channels. Competition was curbed and consumers fared badly. Balance of Payments crisis in 1991: Crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy.
Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests. SOCIAL REFORMS Agriculture: India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 16. % of the GDP in 2007, employed 60% of the total workforce and despite a steady decline of its share in the GDP, it is still the largest economic sector and plays a significant role in the overall socio-economic development of India. The introduction of high-yielding varieties of seeds after 1965 and the increased use of fertilizers and irrigation known collectively as the Green Revolution, provided the increase in production needed to make India self-sufficient in food grains, thus improving agriculture in India.
Removing Socio- Economic Barriers: The biggest challenge in the period of LPG (Liberalization, Privatization and Globalization) in 1991 was the removal of social and economic barriers, through a variety of measures which included family planning, economic welfare programmes, women empowerment initiatives, midday meal scheme, Rural Employment guarantee scheme, Compulsory Education, Union’s intervention in the State etc. Mixed Economy: India has adopted the concept of a mixed economy, in which both the private and public enterprises are given freedom to co-exist.
Prior to 1991, the country was grappling itself with unwanted bureaucracy, which tried to hamper the growth in India leading widening gaps in the Indian culture. Population Conscious: A country with a billion marks in population has started to tread on a road in order to reduce the population. Families are encouraged to have 2-3 children, and the government is not too keen on an impenitent restriction in childbirth like China. Progressive Economy: India is a progressive economy, where emphasis is made on the people’s growth.
All laws of the country are spearheaded to making India a better place for Indians to live in. Government controls have been reduced on foreign trade and investment; privatization of domestic output has proceeded slowly but steadily over the years. ECONOMIC REFORMS: India Inc s stupendous growth can be attributed to ' India Economic Reform ' earnest in July 1991. The balance of payments crisis opened the way for an International Monetary Fund (IMF) program that led to major ' India Economic Reform ‘.
The foreign-exchange reserves recovered quickly and arrested the crisis related IMF and World Bank. Some of these factors which influenced the reforms were: Balance Of Payments Crisis: Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy.
Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalization was slowly embraced. Revenue Deficit: India’s biggest problem arose out of the fact that it had huge revenue deficits. From 1950- 1980, the budget was characterized by Revenue surplus and Capital account deficits. The governments voluntarily allowed Revenue deficits use.
It was caused by excessive employment in the government sector, mounting subsides, growing interest burden, unequal pricing of goods and services by the private sector. They tackled the problem by downsizing the employees in the public sector. Fiscal deficit: The measures to reduce the fiscal measures were started in 1991 – 1992. They initially reduced the fertilizer and food subsides. Then in 1995 the government reduced public expenditure in social welfare. Deficit Financing: The concept of printing currencies was curbed in tackling problems of Fiscal financing, which was in fact crippling the economy by the means of unwanted money supply.
RBI’s measures: The RBI managed to control the money supply in India by Bank rate, Cash reserve ratio, and by Open market operation. Tax Reforms: • Expanding the tax base by including the service sector. • Reducing the rates of direct taxes in India • Abolishing Export subsides • Lowering import duties • Value Added tax • Tax incentives for Infrastructure and Exports Special Economic Zones: is a geographical region that has economic laws that are more liberal than a country's typical economic laws.
An SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. There are 13 functional SEZs and about 61 SEZs, which have been approved and are under the process of establishment in India.
The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import (“EXIM”) policy of India. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally Divestment: The government also started the process of divesting which is a way by which the government reduces its interest in assts for financial objectives. It is mostly done so that the companies would divulge their interests in its core businesses.
Chinese Experience: The reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms. • In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized. • Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue. • Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries. Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996. • Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account. ) • Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors. Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation. • Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs). • Marginal tax rates were reduced. • Privatization of large, inefficient and loss-inducing government corporations was initiated. FACTORS HAMPERING CHINA’S GROWTH:
Low level of education The level of education is an area of concern, where the population is dominant of 30-40 age barrier which causes serious hampering in the economic growth. Language problem One of the main problems that the Chinese people facing is the language barrier. English language is not popular in china and the people in china are behind India in the language proficiency of English. So when they have trade between other countries, the medium of language becomes a problem for them. Poor living conditions
One of China’s most serious problems is that over the past 50 years China’s leaders have constructed two China’s: a modern wealthy China and a backward rural poor China. This “house divided” is a major weakness in contemporary China and to unite this house into a major Asian power will take enormous effort and resources and may require decades to accomplish. Low level of institutional infrastructure and corporate governance: The government is primarily one where the government has maximum amount of control on almost any level of economy.
So if greater autonomy is not given, the growth tends to be very slow. Necessity of skilled labor: Even though labor cost is perceived to be low, the skilled labor remains a serious question to be analyzed. The necessity skills are very much necessary in the sectors of manufacturing and industry. The country severely faces many problems with respect to skilled labor. FACTORS HAMPERING INDIA’S GROWTH: Poverty level: According to the a 2005 World Bank estimate, 42% (456 million Indians)of India's falls below the international poverty line of $1. 5 a day (PPP, in nominal terms Rs. 21. 6 a day in urban areas and Rs 14. 3 in rural areas); having reduced from 60% in 1980. According to the criterion used by the Planning Commission of India 24. 5% of the population was living below the poverty line in 2006–2007, down from 51. 3% in 1977–1978, and 36% in 1993-1994 While poverty rates in India are high, they are not on a par with what neighboring Pakistan and Bangladesh experience. The main reasons for this are large population, and low literacy level. Lack of Resources Natural resources are derived from the environment.
Many of them are essential for our survival while others are used for satisfying our wants. Natural resources may be further classified in different ways. On the basis of origin, resources may be divided into: • Biotic - Biotic resources are those obtained from the biosphere. Minerals such as coal and petroleum are also included in this category because they were formed from decayed organic matter. • Abiotic - Abiotic resources comprise of non-living things. Examples include land, water, air and minerals such as gold, iron, copper, silver etc. lack of hese resources makes a huge difference in the growth of India. So now India has to depend on renewable resources. On the basis of ownership, resources can be classified into: individual, community, national, and international Individual resources: Process Resources The following types of resources can execute an activity within a process. Tangible resource - Conventional resources like plants, equipments, IT infrastructure etc. Intangible resource - Increasingly important resource type including brands and patents and India is lacking these resources.
Infrastructure A well-knit and coordinated system of transport plays an important role in the sustained economic growth of a country. India has a well-developed transport network comprising rail, road, coastal shipping, air transport etc. The commercialization of infrastructure is not progressing fast enough to provide decent living conditions to citizens at large. Lack of Capital Domestic demand in India is rising, but the country does not have the matching supply, making it essential for it to rely on foreign capital.
India is in the early stages of a new economic cycle... It offers a delectable mix of improving political backdrop, strong structural drivers of growth, and accelerating domestically-driven growth, Unlike China, India is a supply constraint and will have to continue relying on foreign capital... Barring any dislocating effect of global events, foreign inflows should continue although at a slower pace. Political problems The main political problems t. hat India faces is the political instability in the country.
The decisions which one political party has taken will be removed by the next government, which leads to instability in the process or activity which is on the way. And other problems are lack of visionary leader, who can lead the country to become a super power. CONCLUSION: Both the countries India and China will grow rapidly, taking a much larger share of global GDP. In both countries, the domestic market will become increasingly attractive to global companies. The division of labor between India and China will become blurred as both countries excel in services and manufacturing.
Trade between India and China will expand, enabling companies in both countries to achieve critical mass. For global companies selling in these markets, this means more local competition. Both countries will create new world-class companies that will be competitive with companies based in the West. For some Western companies, this will create new challenges. Both countries, while remaining relatively poor, will experience rapid growth of the middle class, creating vast new opportunities for Western companies to sell in those markets.
If the above challenges can be tackled in the perspective of both India and China’s growth, then surely we see both the country’s contribution in the world economy as significantly large. We firmly believe that India and China will become world super powers by 2025, but the question is who is first and who is second... ----------------------- NITTE Meenakshi Institute of Technology ALBERT JACOB and JAISON JAMES KRISTU JAYANTI COLLEGE, BANGALORE [email protected] com Emerging Markets in International Trade THEME International Business & the World Economy – Issues and Innovations