PRIMERA STC: C/Mario Henry Paredes Rojas, Rodolfo Antonio Acosta Abarca,

The phrase “emerging market economy” or the “emerging markets” as we now know it, was originally coined by the International Financial Corporation (IFC). The IFC, which is an affiliate to the World Bank and which focuses predominantly on issues of emerging market economies, describes a narrow list of twenty six developing and transitional countries from a range of middle to high-income economies among the developing countries, whose domestic political economies are particularly ripe for foreign investment (Kegley et al., 1997, pp.118-119). Consequently, the original phrase has been expanded to include most developing countries (SustainAbility, 2003, p.1).

Emerging market economies, as defined by the World Bank, consist of more than half the world's population and account for a large share of global output, complimented by high growth rates and possible market potential (GlobalEdge, 2002, pp.1-3).

3.3.1 Emerging markets as preferred investment locations

By 2003, more emerging markets than developed markets had entered the top 10 most preferred investment locations, with China, Mexico, Poland, India, Russia and Brazil leading the way. In 2002, this group of countries received nearly half of all FDI inflows to the developing world (Kearney, 2003, p.2). The US Department of Commerce furthermore emphasise that more than 75% of expected growth in world trade over the next two decades will come from emerging markets. This type of growth in trade is not to be underestimated as it could translate into higher incomes within these countries and higher levels of sustainable development, especially in social and economic infrastructure, which could further escalate the growth rate. It is worth pondering whether many of these countries are suitably equipped to control such economic pressures, which could have large effects on themselves and on their neighbouring countries. Much of the literature on emerging markets suggests that their output instability is largely a product of frequent financial crises, especially in the financial arena, as the emerging market countries face a far more

challenging environment than that of the industrial economies at a comparable stage of development (Fenwick, 2003, pp.1-3).

3.3.2 Emerging markets and their move towards liberalisation and market de- regulation

Emerging market countries differ as regards the speed with which they try to build up a sophisticated domestic financial system and simultaneously open their financial markets to international capital flows. In a study by Edwards (2001, pp.1-2) it was found that capital account openness and productivity performance only manifest themselves after the country has reached a certain level of development. It would therefore be plausible to interpret that countries only take advantage of a greater mobility of capital once they have developed an advanced domestic market. Broadly speaking, Edwards found that emerging markets at high levels of development show that an open capital account is positive, but at very low levels of local financial development. An open capital account policy in an emerging market may have a direct negative effect on economic performance, and it is in this sense that emerging markets may differ from the more “advanced” or developed nations.

3.3.3 List of countries that fit the emerging market criteria

Choosing a list of emerging market countries is not as straightforward as it may seem. The original twenty-six countries chosen by the International Financial Committee (IFC) comprise Zimbabwe, South Africa, Nigeria, China, Indonesia, Philippines, Thailand, Korea, Malaysia, Taiwan, India, Pakistan, Sri Lanka, Poland, Hungary, Turkey, Greece, Portugal, Jordan, Columbia, Peru, Argentina, Brazil, Chile, Mexico and Venezuela (Kegley & Wittkopf, 1997, pp.118-119). It would be worth noting that this list is not fixed and is often designed to shape the purpose of the research in question. For example, JP Morgan, in an emerging market research, has identified only ten countries according to a set of trade criteria for their Emerging Local Market Index. These include Argentina, the Czech Republic, Indonesia, Malaysia, Mexico, Philippines, Poland, South Africa, Thailand and Turkey (Cavanagh, 1996, p.2).

Table 3.1: List of emerging market economies, related economic and social indicators (2002) No. Country GDP billions US $ GDP per Capita US $ Total Population in millions % Urban Pop. 2000 Life Expectancy at Birth HDI Democratic Government 1 Argentina 285.0 12,377 37.0 88.2 73.4 0.844 7.2 2 Brazil 595.5 7,625 170.4 81.2 67.7 0.757 5.8 3 Chile 70.5 9,417 15.2 85.8 75.3 0.831 7.5 4 China 1,080.0 3,976 1,275.1 35.8 70.5 0.726 5.3 5 Colombia 81.3 6,248 42.1 75.0 71.2 0.772 5.6 6 Czech Republic 50.8 13,991 10.3 74.5 74.9 0.849 7 7 Egypt 98.7 3,635 67.9 42.7 67.3 0.642 6.7 8

Hong Kong, China (SAR) 162.6 25,153 6.9 100.0 79.5 0.888 8.8 9 Hungary 45.6 12,416 10.0 64.5 71.3 0.835 6.7 10 India 457.0 2,358 1,008.9 27.7 63.3 0.577 6.1 11 Indonesia 153.3 3,043 212.1 41.0 66.2 0.684 6 12 Israel 110.4 20,131 6.0 91.6 78.7 0.896 6.8 13 Malaysia 89.7 9,068 22.2 57.4 72.5 0.782 6.7 14 Mexico 574.5 9,023 98.9 74.4 72.6 0.796 6.3 15 Peru 53.5 4,799 25.7 72.8 68.8 0.747 6.9 16 Philippines 74.7 3,971 75.7 58.6 69.3 0.754 7 17 Poland 157.7 9,051 38.6 62.3 73.3 0.833 5.7 18 Russian Federation 251.1 8,377 145.5 72.9 66.1 0.781 4.7 19 Singapore 92.3 23,356 4.0 100.0 77.6 0.885 8.6 20 South Africa 125.9 9,401 43.3 56.9 52.1 0.695 6.8 23 Thailand 122.2 6,402 62.8 19.8 70.2 0.762 6.6 24 Turkey 199.9 6,974 66.7 65.8 69.8 0.742 5.8 25 Venezuela 120.5 5,794 24.2 86.9 72.9 0.770 5.8 (Source: UNDP, Development report 2002)

Table 3.1 alphabetically lists the twenty-five emerging market economies and their appropriate development indicators, commonly referred to by the UNDP. These countries are often listed throughout much of the available literature and journals pertaining to emerging market economies. These countries will be referred to during the course of this thesis.

3.3.4 Foreign direct investment moves towards emerging markets between 1990 and 2000

It is clear from figure 2.3 that the rate of FDI in the majority of the emerging economies has increased significantly from 1990 to 2000. For the first time since 1998 more emerging economies than developed markets have entered the top ten most preferred investment locations with China, Mexico, Poland, India, Russia and Brazil leading the way. In 2002 this group of countries received nearly half of all FDI inflows to the developed world. However, because inflows into the industrialised world fell faster than in developing countries over the past two years, the market share of global FDI in emerging markets has relatively increased (Kearney, 2003, pp.4-5).

3.4 Investigating those factors that influence investor decision-making regarding