The Global Emerging Market in Transition: Articles, Forecasts, and Studies

Incorporating Global Risk Management in the Strategic Decision Making Process

INCORPORATING GLOBAL RISK MANAGEMENT IN THE STRATEGIC DECISION MAKING PROCESS Introduction Ten years ago, the global business world was totally different from what it is today. While this is not surprising, the scope of the changes is virtually unprecedented. In 1986, the world was divided into 18 Developed Countries and 125 Developing Countries; 98% of all international transactions were between the 18 developed countries , while only 2% were with the 125 developing countries. Since 1987, approximately 40 of the developing countries have become Emerging Market Countries. Currently, these Emerging Market Countries account for approximately 70% of the world population , 15% of all international transactions, and 25% of the global GDP, which is more than the U.S.’s 21% contribution to global GDP. These Emerging Markets Countries exert a strong influence on the remaining 85 developing countries, for whom they serve as a beacon, and on the developed countries as well, as new markets and competitors. Investing in Emerging Market Countries During the last ten years, the annual growth rate of foreign and domestic investment in emerging markets increased from 15% to 25%. In 1987, only one-half of one percent of the total assets of western pension funds, hedge funds, and mutual funds were invested in Emerging Markets. In 1994, the percentage of these funds invested In Executive Summaries, an official publication of the World Economic Development Congress, September 25–26, 1996, Published by the World Markets Research Center, February 1997. 22 understanding the global emerging market in emerging markets increased to 16%, and in 1995 to around 21%. The growth rate of private American investments in Emerging Market Countries was 37% in 1993, 41% in 1994, and 47% in 1995. Between 1995 and 2005, multilateral institutions will invest over $300 billion in Emerging Market Countries. Naturally, the surge in investment has also had an enormous influence on employment, with the growth in the number of new jobs in emerging markets at 20% per annum—ten times greater than in developed countries. Emerging Market Countries have also become major markets for exports from developed countries. Japan, one of the first Emerging Market Countries during the 1960s, ships 50% of its exports to Emerging Market Countries. Likewise, 40% of U.S. exports and 32% of EU exports are shipped to Emerging Market Countries (1995). Global Trends Global business today is influenced by 5 major trends—political disintegration , economic re-integration, regional decentralization, privatization , and internationalization of global and national business. Because of the rapid increase in the number of Emerging Market Countries, especially during the last six years, two more trends have developed which affect global business—deficit of investment and shortage of capital. These new trends have forced Emerging Market Countries and even regions within the same country to compete for foreign investment. Emerging Market Classification There is no common approach to using specific economic indicators in classifying countries as pre-emerging or emerging markets. Nor is there agreement on criteria used for this classification among major publications specifically covering emerging markets. Tables 1 through 4 contain the results of a study of major worldwide publications specifically covering emerging markets (The Emerging Markets Monitor, J. P. Morgan Emerging Markets Economic Outlook, Standard & Poor’s Emerging Markets, Emerging Markets Investor , and The Economist). The study summarizes the classifications incorporating global risk management 23 designated by the publications for a total of 43 countries on five continents. Of the 43 countries considered, only 15 are designated as emerging markets by all the publications, and 12 of the 43 are designated as emerging markets by only one of the publications. These discrepancies exist because each publication has its own approach for classifying emerging markets. The only significant similarity in the approaches used by each of the publications is the use of fundamental economic and financial indicators. Kvint’s Emerging Market Classification Table 5 includes the results of a recent evaluation I conducted to determine a list of Emerging Market Countries. It is important to note the differences between my evaluation and the above study. There are many countries that my analysis determines to be emerging markets, which are not considered to be emerging markets by the publications listed in Tables 1 through 4. These include the following countries: Europe • the Baltic States of Latvia, Lithuania, and Estonia. These countries have stable, developed democracies, all with higher GDPs per capita than several countries in Tables 1 through 4 • Slovenia, which is the...