International Business and Emerging Markets

Introduction

In the contemporary world, international competition has been on an increase, so that production facilities as well as markets tend to shift across the globe in a rapid manner beyond the commonly acknowledged markets. According to United Nations Development Programme/Cambodia, Cambodia, Supreme National Economic Council, and John F. Kennedy School of Government (2006), expanding a business internationally is fundamental in most cases; unlimited opportunities for growth are surfaced, especially in fast growing and emerging markets. However, expansion of business to other foreign markets also creates a unique set of challenges, which range from manufacturing to the building of the consumer base. While this is so, many businesses have become increasingly motivated to invest in upcoming markets, which are also known as emerging markets.

The term emerging markets refers to a nation where social and business activities are undergoing or experiencing not only rapid growth, but also rapid industrialization. A good example of an emerging market is Cambodia. Economists have acknowledged these markets as vastly becoming the essential drivers of the global economic growth. A great deal of multinational organizations are always inclined to invest in emerging economies, precisely to cash where the growth is seen today and also expected in the foreseeable future (Rodriguez & Rodrik, 2000). They are further motivated by the emergent trends and expectations of emerging economies growing at a higher rate that the already established economies. While it is a noble idea to establish a venture in emerging markets, it is necessary to conduct an analysis of that particular market in order to determine the short-term as well as long-term benefits presented to the company by that market. An organization can conduct this analysis based on four dimensions of the country, which include: Strengths, Constraints, Opportunities, and Risks. Guided by relevant theories, this paper aims at conducting an extensive analysis of Cambodia as an emerging market and thus determining the viability of investing in the country by a multinational company.

Profile of Cambodia

Cambodia is a country located in the South Eastern part of Asia, southern portion of the Indochina Peninsula. The total area of land is approximately 181,035 square kilometers. On the North West, the country is neighbored by Thailand while Vietnam borders it to the East. To the southwest border, there lies the gulf of Thailand. The country is inhibited by a population close to 14.8 million. According to Öjendal and Lilja (2009), Cambodia is ranked seventieth largest country in terms of population in the entire world. The country is said to be a constitutional monarchy and it is operated as a parliamentary representative democracy. In addition to this, a king heads the country, but there is a Prime Minister who is the leader of the government. Towards the end of year 2011, it was reported that the country enjoyed a per capita income in PPP of $2,470. On the other hand, the company recorded a $1,040 in nominal per capita. Since it is an emerging market, the nation’s per capita income experiences a rapid growth. However, relative to the neighboring regions, it lags behind despite its vast growth. The main sector in the country is agriculture and relevant subsectors. The country is very rich in terms of agricultural products such as rice, rubber, timber, fish in addition to garments.

The annual growth rate of the country’s GDP as at 2010, which accounted for the period between 2001 and 2010, was 7.7% and this placed Cambodia among the top ten countries depicting a high annual growth rate across the world.

The fastest growing sector in this particular country is the tourism industry. However, the leading sector is the textile industry. Cambodia has very intimate relationships with China since China is the biggest source of foreign direct investment. Indeed, as European Commission Asia-Invest Programme, European Commission and Europe Aid Co-operation Office (2005) reported, China spent approximately $8 billion to establish close to 360 projects in just seven months in the year 2011.

As at 2010, it was reported that Cambodia was harboring 14,805,358 people with the majority being of the Khmer origin. The rate of birth experienced in this particular country, according to Sen, Asher, and Rajan (2004), is 25.4 per 1,000 while that of population growth is 1.7%. This is higher in than the neighboring countries, including India.

Analysis of the Country

To analyze this country and to determine its viability for multinational businesses, four dimensions will be assessed. These will include strengths, constraints, opportunities, and risks. To analyze the country effectively in the stance of these dimensions, theories related to economics will be integrated. The use of theories will justify the rationale of the analysis (Krumm & Kharas, 2004).

Strengths

Macroeconomic Stability

The strengths of this country are better explained using the Asian miracle theory. Foremost, the country enjoys a sustained growth. This can be derived from the macroeconomic stability exhibited by the country. Macroeconomic stability is a term used in macroeconomics to denote a nation’s economy that has opted to minimize the vulnerability to shocks originating from external sources and thus increasing the prospects for sustained growth. Indeed, the presence of macroeconomic stability in Cambodia is indeed a strength as both the EU and IMF emphasize on it as a driver for sustained growth (Edmonds & Pavcnik, 2004).

Pertinent to macroeconomic stability are five variables, all of which Cambodia exhibits as positive. Foremost, the country experiences a low and stable inflation. Throughout 2012, the nation’s inflation rate did not exceed 3% and this was particularly due to the stable prices of foods. With a low and stable inflation rate, it implies that Cambodia has a healthy demand in the market rate.

In this country, low long-term interest rates are usually prevalent. The presence of low long-term interest rates in any particular country is assumed to reflect a stable future inflation expectation. In addition to this, owing to the fact that the country exhibits low long-term interests rate, the Cambodian economy is stable and it is likely to remain like that for a long time in the future. In correspondence to the Maastricht criteria, the economy maintains the long-term interest rates below 9%.

Still on the context of the macroeconomic stability, the country enjoys a low national debt relative to the Gross Domestic Product. In the year 2013, Cambodia rerecorded a government debt ratio of approximately 28.5% of the economy’s Gross Domestic Product. From the World Bank records, between 1996 and 2012, the government debt to the Gross Domestic Product averaged 33.61%. The year 2013 recorded the highest ratio of 43.16 while 2008 recorded the lowest ratio of 27.46%.  While this ratio may seem high, it is indeed low when compared to other countries such as Mozambique (39.90), Myanmar (53.53) and Angola (29.90) (Bailey, 2004). When an economy has a low national debt relative to the Gross Domestic Product, it serves as a clear indication that such an economy or the government of that particular economy will have the flexibility to utilize the revenues it obtains from taxes to address the domestic needs rather than offsetting dues to foreign creditors. In addition to this, the low national debt relative to the Gross Domestic Product allows a lenient fiscal policy whenever Cambodia is faced with crisis.

Another key macroeconomic stability attribute of Cambodia relates to the country’s currency. The currency used in the Cambodian economy is acknowledged as Riel and abbreviated as KHR. However, the use of US dollar is widespread in this economy and, indeed, the US Dollar has been termed as the second currency in the Cambodian economy (Rodriguez & Rodrik, 2000). This currency is relatively strong and stable in the context of the international financial market. In most cases, to know whether a currency is strong, the US Dollar is used in comparison. To be precise, as of December 2012, 1 US Dollar was exchanged for 4,055 Riels and this can be considered as a stronghold of the currency, considering the rate at which other currencies are exchanged for one dollar. For instance, as at may 2013, 1 USD was exchanged for 96.1 AOA, which is the Angolan currency. In this case, the Cambodian currency is exceptionally stable. This stability has been fundamental as it has served to allow both importers and exporters to develop long-term strategies. Moreover, it has led to the reduction of the need for managing risks associated with exchange risks for the investors. In addition, the currency stability in Cambodia has served to mitigate the threat posed by the debt issue in foreign coin (Bailey, 2004).

The prevalence of macroeconomic stability is a platform for the Northern European Company to start a commercial and industrial real estate development venture in Cambodia. To be precise, the stable low inflation will ensure improved productivity and non-price competitiveness. In addition to this, the stability will ensure higher levels confidence with regard to the company’s clients and the company itself. Moreover, the stable economy in Cambodia will mean growth once the company sets in operation in this particular country.

Growth Fundamentals

In this context, Cambodia exhibits strengths in investments and savings. The level of investment in Cambodia is significantly high. The economy is inhabited almost entirely by domestic investments of all forms. This is particularly because the market is in the process of advancing. However, foreign investors have started streaming in to realize the opportunities that the economy is exhibiting or presenting to the domestic and the outside world. China is the leading investor in Cambodia while it establishes infrastructures in this particular economy. One of the remarkable Chinese investments is the 400km long railway line that runs through the rugged green terrain. In 2011 alone, China established 360 projects worth $8 billion (Krumm & Kharas, 2004).

Besides the Chinese, Vietnam is a significantly upcoming force in terms of investments in Cambodia. This can be mapped in the last three years. According to UNCTAD (2005), the Vietnamese investment in Cambodia has quadrupled. As such, in the year 2010, Vietnam invested $566 million in 41 projects. However, by 2012, the investor had increased this amount to $2.5 billion. In their research study, Sen, Asher, and Rajan (2004) mentioned that Vietnam contributes approximately five percent of the Cambodia’s GDP and additionally it has created at least 30,000 jobs for the Cambodian citizens.

The presence of investors such as China and Vietnam has rendered superior infrastructure in Cambodia and this has exceptionally boosted the economic growth of this particular economy while still rendering benefits to the investors.

As it seems, foreign firms do the development in Cambodia. The country is in the process of developing infrastructure and this implies that by initiating commercial and industrial real estate development business, the Northern European Company will add up to the development projects and initiatives in this country. Cambodia is in need of development initiatives and this is almost a guarantee for an appealing business to the company.

Macroeconomics Conditions

For any economy to enhance its growth potentials, it is necessary that political stability is created. In their research study, Gwartney and Lawson (2003) identified that since 2008 the political stability that has been noted in Cambodia has not been experienced for decades. This is still the same with reference to the territorial unity, which is presently exceptionally strong relative to the past conditions. In the last political elections, which occurred ten years ago, the country experienced the most ever peaceful and transparent elections. Unique to the previous elections, the 2003 elections were fair and just. There were no intimidations and violence and there was credibility attached to the entire process. The presence of political stability in any country is perceived to be the key since it is translated to opportunities by most foreign investors (Gaeta, 2012).

Political stability is key to the Northern European Company’s confidence. Therefore, in relation to the country’s macroeconomic conditions, Cambodia is an excellent investment destination for this company as its survival is secured especially taking the absence of violence, malicious acts and social unrest into account. The company is guaranteed safe running free from interruptions, which are politically motivated.

The Economy’s Natural Resources

Another strength that cannot be overlooked in this analysis is the presence of natural resources. While the country does not enjoy the availability of widespread variety of natural resources, the few it has are critical and are of the type that any economy desires to have. In other words, they are rare in most regions of the world and are usually of high value.

One of the most essential resources is iron. In the northern region of Cambodia, there are reserves of extremely high quality and high-grade iron ore, which ranges from to 2.5 to 4.8 million tons. In Kampong Thom province, the Chinese miners have reported traces of manganese. In addition to this, phosphate, limestone, and clay deposits have been discovered. These are usually processed within Cambodia. Also related to iron, in Cambodia’s geological strata, slaty, and coal are said to be present. Furthermore, since the onset of the 19^th century, Sapphires, Zircons, and Rubies have been mined in abundance. Still, in several parts of the economy, traces of silver and gold have been reported.

Another significant natural resource is hydroelectric power. The country usually has a high potential for hydroelectric power generation. This is particularly from the swift current of the middle Mekong river.

Though not pronounced, traces of offshore oil have been reported and initiatives have been made towards taking advantage of this naturally appearing resource. Forestry is another major resource in Cambodia. The area covered by forests is said to be 70% of the entire country. Indeed, forestry constitutes the second pillar of the Cambodian economy alongside agriculture. The main products from the presence of forests in Cambodia are timber and firewood. The four economic initiatives of the Cambodian government’s first plan include timber (Mugumya, 2005).

While these might not directly apply to the commercial and industrial real estate development field, they are indeed motivating factors for establishment of a venture in this country by the Northern European Company. To achieve these resources, there is need for experts who have to camp at these sites. To process these resources, there is a need for industrial buildings and with the Northern European Company present; these needs will be catered for. In addition to this, some resources will form the raw materials for the company. For instance, for every commercial and industrial real estate the company develops, there is a need for power. The presence of hydroelectric power in Cambodia solves this particular need effectively.

Constraints

While it is a rapidly advancing market, a number of constraints face Cambodian economy and these inhibit its desirability to foreign investors.

Market Size

According to Easterly and Yu (2002), the total market size in Cambodia is still limited. The country is characterized by a small and a poor population of about 13 million people, which renders the market as a rather unattractive one to foreign investors. The upper and middle class population, which has the purchasing power to buy sophisticated consumer goods, is only found in one region of the country. In his research, UNCTAD (2005) identified that the market for most interests to potential investors, especially the foreign ones, is smaller than the domestic one as compared to the regional interest.

With such a limited size, there is likelihood that the Northern European Company will not reap high benefits from that economy. The market is an emergent one and every other multinational is seeing the rationale of investing in this particular market. As more and more multinationals enter the market, competition within the industry will intensify and due to the small size of the population, it implies that each competitor will have to settle with a significantly less portion of the market. This is detrimental for a multinational investor (Mugumya, 2005).