Onur SAKA 8/13/2011 Emerging Markets Give Boost to Global Economy Emerging markets have been attractive for

investors and enterprises for a very long time. Today, they are in a great shape with confidence after surviving the U.S. financial crises and weathering the recession better than advanced economies. China has become the most important contributor to world growth based on Purchasing Power Parity weights followed by India 1, BRIC economies are the fastest growing economies of the world; the reality is that the emerging markets are driving the global recovery in post-crisis era, plus, they are in the drivers seat for the global growth. Reckitt Benckiser, the Anglo-Dutch group and the maker of Nurofen painkillers, Clearasil skin care treatment, Airwick air fresheners and Cillit Bang cleaners, seems to benefit from the advantages of emerging markets. According to the Financial Times, growth in emerging markets helped Reckitt to offset weaker sales in Europe and boost its interim dividend by 10 per cent 2. Reckitts largest division, Europe, saw a very weak performance at the same period; sales growth felt by 2 per cent. But, their participation and market share in emerging markets gave them a boost to offset this negative growth in the developed economies and provide a 14 per cent increase in net revenues. They, clearly, reap the fruits of their successful strategy in the emerging markets. Integration of economies, liberalization of markets, weakening trade barriers and technological developments created the todays global world. In the past years globalization is commonly meant to be a cost arbitrage; today, successful corporations shore up competitive advantage of diverse intellectual capabilities, growth and quality enhancement opportunities and the ability to get products to several markets in a shorter time. Globalization is a strategic imperative to most multinational corporations and emerging markets are clearly an important aspect of this strategy for several reasons. Emerging markets are the main engine of world growth, in addition to the previous examples of China and India; Turkey posted a record GDP 11 per cent growth in the first quarter of 2011 3 while the developed economies were struggling with post-crisis recession, U.S. and Eurozone debt problems and decreasing growth rates. Another impressive example for the Turkish economy is from Boing; the U.S. aerospace giant targeted growth in emerging markets and now is in talks to sell its latest 787 Dreamliner to the Turkish companies. Regarding the 12 jets to be delivered to Turkey by the end of the year, Aldo Basile, Boeing Commercial Airplanes vice president, said Turkey might need to purchase around 300 more planes in the next decade 4. In addition to biggest and fastest growing emerging markets, BRICs, there are tremendous advantages in less prominent but more promising emerging markets such as Egypt, Poland, Mexico, South Africa and Turkey. These
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Emerging Markets Main Engine of Growth, Callen, Tim, IMF Research Department, 10/17/2007 Developing Markets Give Reckitt a Boost, Wembridge M., Lucas L., Financial Times; 7/25/2011 3 Turkey Growth Outpaces China Piling Pressure on Central Bank, Bryant S., Gokoluk S. Bloomberg, 6/30/2011 4 Boing Targets Growth in Emerging Markets, Kurtaran G. Hurriyet Daily News, 6/9/2011

countries does not generate a GDP as big as BRIC economies but their growth is remarkable, and thus became very attractive for both investors and multinational corporations like Reckitt Benckiser. The bursting of U.S. loan bubble and its effects on other developed economies, the recent financial crisis, caused a worldwide recession. But, Emerging markets weathered the global recession better than advanced economies; many have seen growth bounce back during the past year, and they seem poised for high growth in coming years. The effects of financial crisis on emerging markets have depended on the exposure to trade and financial flows from these advanced economies. Asia affected least with most favorable outcomes and modest declines in growth. Middle East, North and South Africa also had favorable numbers due to their relatively weaker connection and integration with advanced economies. On the other hand emerging markets in Europe and Latin America had worse affects due to their strong ties, though the Latin America economies recovered strongly. But the advanced economies are still struggling in the post-crisis period to thrive their economies. Rising labor, raw material and production costs and low demand hurt advanced economies and thus, their companies. The domestic companies of these advanced economies and the global ones with unsuccessful strategies were the most vulnerable businesses to the crisis. The multinational companies with a successful global strategy and those who diversify their operations, production and markets enjoyed favorable revenues and growth like Vodafone. The British telecommunication giant has registered an increase of 32 per cent in revenues in Turkey; this growth in 2010 made their Turkish subsidiary fastest growing unit in the whole European region.5 There are abundant success stories and examples like this one to prove the emerging markets outperform developed markets. More promisingly, according to the estimates of IMF in June developing economies may grow 6.6% this year, compared with "advanced" nations' 2.2%. The theory of investing in emerging markets is downright; these economies are growing faster than others, they generate remarkable GDPs, their population becoming wealthier and these create opportunities for companies to expand their businesses and make profits leading to rise of share prices. Plus, diversification and creating value are crucial for companies to sustain their businesses in critical periods like crisis and recession periods. With overseas investments companies benefit from new markets; they take advantage of location specific assets such as labor, capital and growth. They have the opportunity to reduce competition and ability to create vertical and horizontal linkages. And thus, they reduce and spread risks by diversifying which is a primary factor to weather a crisis like Reckitt Benckiser and others do. Beside advantages, emerging markets always embody political, financial and competitive risks. A coup dtat or a revolution can destabilize the growth story very quickly. In reality, many of these countries are much more stable and well governed than they were 20 years ago, but the perception remains. But the emerging-market companies may not offer the same protections that the European and U.S. regulatory structure provides. And also, inflation is the most stinging drawback of the emerging markets. On the other hand, financial and economic
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Vodafone Turkey Sees Record Growth, Invest In Turkey, 02/04/11

problems and significant risks from global recession to downgrade of U.S. credit grade shows that even the worlds biggest, most powerful and stable economy possesses serious risks, which is in conflict with the scary theories of risks in emerging markets. In other words, it is impossible to eliminate risks; a company is exposed to a variety of risks in everywhere and those risks must be evaluated seriously. The opportunities in emerging markets are worth taking these risks. When the advantages of emerging markets such as rapid population and economic growth, sustained development, a growing middle class and increasing purchasing power come together with the advantages of doing business overseas such as reaching new markets, diversifying, spreading risks and sustainability creates an inevitable field for the companies to invest. As seen in the Reckitt Benckiser and other examples, the ones who evaluate the markets and possible risks properly and invest in promising emerging markets benefit from these advantages. The others that missing this opportunity should have already began to worry; studies show that in 50 years, emerging markets will be nearly twice the size of today's economic leaders and they already begin to create their own global competitors such as Petrobras from Brazil, HTC from Taiwan, Cemex from Mexico and Ranbaxy from India. 6

Onur SAKA 8/13/2011, Los Angeles

The Worlds Top 25 Emerging Market Multinationals, Vardy N., Seeking Alpha, 03/19/2007