BRIC by BRIC – Tier II Emerging Markets

Emerging markets have been the darling of portfolio and foreign direct investors in recent times, with the whole world recognising their growing importance in the global economy. Particularly, the so-called BRIC economies - Brazil, Russia, India and China – have attracted the lion’s share of investment inflows. The term BRICs which caught the imagination of the world was coined by Goldman Sachs in a 2003 report, which predicted that these four rapidaly developing economies will eclipse most of the current richest countries of the world by the year 2050.

The BRICs economies having established themselves as the future superstars, the search for more emerging stars is on as a larger part of the earth’s population is getting involved in the mainstream of the global economy. Investors and multinational firms are seeking opportunities in a number of smaller investment destinations that offer just as much, if not more, opportunity. Economist Intelligence Unit, in a recent study focused on tier II emerging markets, observed that more and more companies are including the second tier emerging markets in their corporate strategy.

The second tier emerging markets include countries of South-East Asia, such as Vietnam and Indonesia; those of Eastern Europe, such as Poland and Romania; those of Latin America, such as Mexico and Venezuela; and countries of Africa, such as South Africa and Nigeria. Here are some of the major findings of the Economist study.

• Second-tier emerging markets are becoming an established part of corporate strategy.
• Companies see these markets as sources of growth. Access to low-cost labour and resources is also an attraction.
• Poor rule of law remains a significant barrier to investment. Dealing with governments and regulators, poor rule of law and weak regulatory regime were identified as a significant challenge, poor infrastructure being another problem.
• Asia-Pacific is seen as the greatest source of opportunity.
• Improving relationships with local governments seen as the best way to manage risk.

Who are the hottest of them all?
Top five countries which are perceived as offering the best investment opportunites are Vietnam, Mexico, Indonesia, Poland and Romania. A brief about what makes these attractive and what are the risks and challenges.

Currently, investment in Vietnam is centred around heavy industry. Light industry, construction, hotels and tourism, and transport and telecommunications are also important sectors and with rising cost of labour in China and India, companies are looking to Vietnam as an outsourcing destination for IT services. Vietnam’s attractiveness as an investment destination is expected to increase with its entry into WTO.

In Mexico, NAFTA has been a major driver of foreign investment and electronics, computer and automotive industries have traditionally received the majority of FDI. Going ahead, substantial progress will be required on fiscal reform, labour reform and liberalisation of sectors such as telecommunications and energy, in order to realize the country’s potential as an investment destination.

Indonesia’s wealth of natural resources, particularly in the extractive sectors, has provided the main attraction for foreign investors. While mining and hydrocarbons sectors have been the largest recipients of FDI, pulp and paper, chemicals and financial sectors have also received significant inflows. In order to maintain its attractiveness, Indonesia will need to move fast on the financial, legal, regulatory and bureaucratic reforms, labour reforms and improvement in infrastructure.

Most of the foreign investment in Poland has come from companies headquartered in EU member countries. Manufacturing and financial sectors have the major beneficiaries. The attractiveness of Poland as an investment destination looks set to increase over the near term, with improvement in macroeconomic environment, relatively slow growth in wages and rapid growth in productivity.

Romania’s advantages as a location for investment include a domestic market of about 22m consumers and the potential—partly owing to a good geographical position at a crossroads of traditional trade routes—to emerge as a regional hub. It has a comparatively cheap and skilled workforce and a diversified industrial structure that allows intermediate inputs to be bought locally. The main concerns for foreign investors in Romania are the legal and regulatory systems, which remain unpredictable; excessive red tape; and the state's failure to ensure the uniform enforcement of the law.