Davos Notebook

Where emerging markets are headed next

By S.D. Shibulal
January 24, 2013

In its video presentation “Looking to 2060: A Global Vision of Long-term Growth,” the Organization for Economic Cooperation and Development predicts that China will soon surpass the United States to become the world’s largest economy, and will account for 28 percent of global gross domestic product by 2030. The OECD also predicts that by 2060 the combined GDP of China and India will overtake that of the OECD economies. Meanwhile, Bain estimates that by 2020 emerging economies will account for two-thirds of global economic growth.

Without doubt, emerging countries are showing more resilience and promise than established economies in the Americas and the euro zone.

While emerging economies have shown potential for many years, they came of age during the global financial crisis. Thanks to prudent government and monetary policies, they have helped stabilize the global economy. A closer look at the emerging market growth story reveals some of its key strengths.

Investment potential

Emerging markets provide an attractive destination for investment funds and already account for nearly half and one-fourth of global foreign direct investment inflows and outflows, respectively. However, they still face challenges, including inflation, income inequity and poor governance, that threaten their growth. They remain countries of contradiction, with high growth on one hand and inequitable growth and underdevelopment on the other.

Business potential

With almost $2.5 trillion in assets, the Industrial and Commercial Bank of China was the fourth-largest bank in the world in 2012. In India, conglomerates ? such as Aditya Birla Group, one of the world’s most cost-efficient producers of copper and aluminium – are showing their peers how to succeed. As emerging market businesses grow into global leaders, they will strengthen as well as disrupt the competitive landscape. The Indian company Tata Nano’s emergence as a leader in low-cost, four-wheel transportation is a classic example.

Leading emerging-market multinationals will not only compete with companies from the developed world but also will invest in them through joint ventures, mergers and outright acquisitions. This will open up opportunities for companies in the developed world to sell their knowledge, expertise and technology to the emerging world.

Innovation potential

Emerging markets have moved up the value chain beyond their traditional roles as cost-saving hubs. Today they are hubs of growth, talent and innovation. Innovation in emerging markets, however, is not about designing bigger, faster and smarter products but rather leaner, more durable and more affordable ones. Narayana Hrudayalaya, for instance, is one of India’s leading cardiac care hospitals, which is bringing state-of-the-art medical facilities to the masses. Founded by Dr. Devi Shetty, the average open-heart surgery at the hospital costs less than $2,000. This is a third of the cost elsewhere in India and a fraction of its costs in the U.S.

Another example, the Tata Nano, is an outcome of reverse innovation, which led to it being the cheapest car in the world at $2,500. In China, companies such as Lenovo, BYD, Alibaba and Huawei have risen in the rankings of the world’s most innovative companies. Innovations from emerging market companies are no longer limited to local markets but appeal to a global audience. For instance, 60 percent of multinational corporations in a recent survey said they expect to conduct research and development in China for their global markets.

Frugal innovation, which plays a key role in emerging markets, is gaining popularity even in developed markets.

Talent potential

Rising domestic costs have diminished emerging markets’ potential for labor cost savings, but there are finding new opportunities to supply large-scale technical and English-speaking human capital. In the United Kingdom, the number of engineering graduates dropped 3 percent, to about 12,000, from 2003 to 2011; the drop in computer science graduates was a steep 27 percent (to 11,400) in the same period. In contrast, India produces close to 700,000 engineers each year. Yes, research indicates that about 75 percent of these graduates aren’t directly employable because they lack industry-relevant skills. However, India’s corporate sector has found a solution in the form of in-campus training and apprenticeship programs. We have trained thousands of engineers at the Infosys campuses in India each year. We recently launched a technical training and apprenticeship initiative in the UK, which has met with resounding success. That, I believe, is as good an example of developing world contribution as any.

PHOTO: A Tata Motors Nano car is loaded onto a goods train for shipment at Sanand railway station in the western Indian state of Gujarat September 1, 2011. REUTERS/Amit Dave

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