LOVELY PROFESSIONAL UNIVERSITY

LSM (193)

Capstone Project on

Topic-Comparison of emerging economy through

macro level indicators
Submitted to -: Submitted by-:

Mr. Vishal Chopra Group: s025

Mohit Khanna(RS1904B50)

Ravish Sharma (RS1904B51)

R. Swadeep Chhetri(RS1904B52)

Introduction:
What is Emerging Economy?

Rapidly growing and volatile economies of certain Asian and Latin American countries.

They promise huge potential for growth but also pose significant political, monetary, and social risks.

Emerging Economies are those regions of the world that are experiencing rapid informationalization
under conditions of limited or partial industrialization. This framework allows us to explain how the non-
industrialized nations of the world are achieving unprecedented economic growth using new energy,
telecommunications and information technologies.

An emerging market economy (EME) is defined as an economy with low to middle per capita income.
Such countries constitute approximately 80% of the global population, and represent about 20% of the
world's economies. The term was coined in 1981 by Antoine W. Van Agtmael of the International
Finance Corporation of the World Bank. Although the term "emerging market" is loosely defined,
countries that fall into this category, varying from very big to very small, are usually considered
emerging because of their developments and reforms. Hence, even though China is deemed one of the
world's economic powerhouses, it is lumped into the category alongside much smaller economies with a
great deal less resources, like Tunisia. Both China and Tunisia belong to this category because both have
embarked on economic development and reform programs, and have begun to open up their markets and
"emerge" onto the global scene. EMEs are considered to be fast-growing economies. 

What an EME Looks Like?

EMEs are characterized as transitional, meaning they are in the process of moving from a closed
economy to an open market economy while building accountability within the system. Examples include
the former Soviet Union and Eastern bloc countries. As an emerging market, a country is embarking on
an economic reform program that will lead it to stronger and more responsible economic performance
levels, as well as transparency and efficiency in the capital market. An EME will also reform its
exchange rate system because a stable local currency builds confidence in an economy, especially when
foreigners are considering investing. Exchange rate reforms also reduce the desire for local investors to
send their capital abroad (capital flight). Besides implementing reforms, an EME is also most likely
receiving aid and guidance from large donor countries and/or world organizations such as the World
Bank and International Monetary Fund.  One key characteristic of the EME is an increase in both local
and foreign investment (portfolio and direct). A growth in investment in a country often indicates that the
country has been able to build confidence in the local economy. Moreover, foreign investment is a signal
that the world has begun to take notice of the emerging market, and when international capital flows are
directed toward an EME, the injection of foreign currency into the local economy adds volume to the
country's stock market and long-term investment to the infrastructure. 

For foreign investors or developed-economy businesses, an EME provides an outlet for expansion by
serving, for example, as a new place for a new factory or for new sources of revenue. For the recipient
country, employment levels rise, labor and managerial skills become more refined, and a sharing and
transfer of technology occurs. In the long-run, the EME's overall production levels should rise, increasing
its gross domestic product and eventually lessening the gap between the emerged and emerging worlds. 

Local Politics vs. Global Economy

An emerging market economy must have to weigh local political and social factors as it attempts to open
up its economy to the world. The people of an emerging market, who are accustomed to being protected
from the outside world, can often be distrustful of foreign investment. Emerging economies may also
often have to deal with issues of national pride because citizens may be opposed to having foreigners
owning parts of the local economy. Moreover, opening up an emerging economy means that it will also
be exposed not only to new work ethics and standards, but also to new cultures. The introduction and
impact of, say, fast food and music videos to some local markets has been a by-product of foreign
investment. Over the generations, this can change the very fabric of a society and if a population is not
fully trusting of change, it may fight back hard to stop it.

Indicators to be studied:
Following were the Macro economical indicators which we have taken for our study they are:-

Gross Domestic Product (GDP): The total cost of all goods and services produced by residents and
non-residents in the country. The first estimates of GDP were made in the USA. Being an indicator of
changes in the cost of goods and services within the country for a certain period, the GDP reflects the
growth rate of the economy. The GDP is calculated as the sum of consumption volumes, investments,
government spending and exports with imports subtracted. GDP growth characterizes the state of the
economy, and the growth in comparison with other countries indicates the benefit of capital
investment in the economy of this country.

Gold and Foreign Currency Reserves: Country gold and currency reserves held by the Central
Bank or Financial bodies. Large reserves of foreign currency and gold represent the level of security
and the benefits of investing in the economy of the country.

Inflation Rate: An important economic indicator. It shows the rate at which prices are rising.

Unemployment Rate: The average number of unemployed citizens over 18 years of age relative to the
total labor force. Only persons who are registered as unemployed are taken into account. This indicator
first appeared in the 1930s in the United States during the Great Depression. A low unemployment rate
indicates a large number of citizens employed in the production of goods and services. An increase in
unemployment results in lower GDP: employment in the production of goods is lower, hence,
production declines.

Interest Rate: An interest rate is the rate at which interest is paid by a borrower for the use
of money that they borrow from a lender. For example, a small company borrows capital from a bank
to buy new assets for their business, and in return the lender receives interest at a predetermined interest
rate for deferring the use of funds and instead lending it to the borrower.

Consumer Price Index (CPI): Indicator showing the change of value of the consumer basket of goods
and services. The index was first calculated in the US. It is calculated using average items chosen by
residents. The index has a greater impact on the calculation of the cost of living of citizens and is also
an inflation indicator. According to the index rising interest rates begin to rise. Core CPI is the
consumer Price Index excluding food and energy.
Objective of the Study:

Following were some objective of the study they can be:-

 To find out the potential present in the country economy where the companies can invest.

 To discover the untapped potential of the economy where development can be done.

 To compare all the possible Macro economic factors of different countries.

Research Methodology:

 Type of Research : Descriptive, Analytical Research

 Source of Data Collection: Secondary Data through Journals, Websites, Research Papers.

Scope of the Study:

The main point we have consider while selecting this project was related to study the different indicators
of Macro Economics of 10 countries to find out the potential in the countries where in the companies can
invest or can even start their operations.

Literature Review:

Strategy Research in Emerging Economies: Challenging the Conventional Wisdom

Mike Wright Igor Filatotchev, Robert E. Hoskisson, Mike W. Peng (14 JAN 2005)
introduction to the Special Issue on ‘Strategy Research in Emerging Economies’ considers the nature of
theoretical contributions thus far on strategy in emerging economies. We classify the research through
four strategic options: (1) firms from developed economies entering emerging economies; (2) domestic
firms competing within emerging economies; (3) firms from emerging economies entering other
emerging economies; and (4) firms from emerging economies entering developed economies. Among the
four perspectives examined (institutional theory, transaction cost theory, resource-based theory, and
agency theory), the most dominant seems to be institutional theory. Most existing studies that make a
contribution blend institutional theory with one of the other three perspectives, including seven out of the
eight papers included in this Special Issue. We suggest a future research agenda based around the four
strategies and four theoretical perspectives. Given the relative emphasis of research so far on the first and
second strategic options, we believe that there is growing scope for research that addresses the third and
fourth.

Understanding Business Group Performance in an Emerging Economy:, Daphne Yiu,Garry

D. Bruton,Yuan Lu (JAN 2005)
The prevalent organizational form in most emerging markets is business groups. These groups have
typically been viewed through a transaction cost economics perspective where they are perceived as
responses to inefficiencies in the market. However, the evidence to date on what generates a positive
business group-performance relationship in such environments is not well understood. This study
expands the understanding of business groups by employing the resource-based and institutional
theoretical perspectives to examine how groups acquire resources and capabilities to prosper. The
empirical evidence is based on over 224 business groups in the emerging economy context of China
and shows that most of the endowed government resources do not help business groups to create a
competitive edge. Instead, those business groups with strategic actions to develop a unique portfolio of
market-oriented resources and capabilities are most likely to prosper. The results provide critical
insights on the relationship between the initiation of institutional transformation and the desired
outcome to be realized by organizational transformation, thus enriching our understanding of
institutions and strategic choices facilitated or constrained by organizational resources in emerging
economies.
Miller and Zhang (1999), through moral hazard elements and game theory applications, the
speculative attack timing occurred in the East Asian crisis can be explained under three views. First,
the non-existence of creditor co-ordination could imply a stop in rolling over loans (Radelet and
Sachs (1998)). Second, unsustainable indebtedness carried out by domestic agents, with assumed
guarantees from government, together with highly reversible capital flows, could be halted (Dooley
(1997) and Krugman (1998)). Third, a speculative attack could be led by large enough market agents
given probable profits come from succeeding, even facing sounds macroeconomic fundamentals in
the emerging economy.

Organizational slack and firm performance during economic transitions: two studies from
an emerging economy
Justin Tan, Mike W. Peng (4 NOV 2003)
How does organizational slack affect firm performance? Organization theory posits that slack,
despite its costs, has a positive impact on firm performance. In contrast, agency theory suggests
that slack breed’s inefficiency and inhibits performance. The empirical evidence, largely from
developed economies, has been inconclusive. Moreover, little effort has been made to empirically
test whether such an impact (positive or negative) is linear or curvilinear. This article joins the
debate by extending empirical work to the largely unexplored context of economic transitions.
Specifically, two studies, based on survey and archival data (N = 57 and 1532 firms, respectively),
are undertaken in China's emerging economy. Our results suggest (1) that organization theory
generates stronger predictions when dealing with unabsorbed slack, and (2) that agency theory
yields stronger validity when focusing on absorbed slack. Furthermore, we also find that the
impact of slack on performance is curvilinear, which resembles inverse U-shaped curves. Overall,
our findings call for a contingency perspective to specify the nature of slack when discussing its
impact on firm performance.

Fred Hu (2004) also finds a negative effect associated with using fixed exchange rate regimes on
economic growth. His study focused on China in particular, and the need for this country to liberalize
their currency and capital control. He concludes that China must go through a gradual process that will
ultimately lead them to a more liberalized system overall. First, they must remove the peg causing them
to have a free floating exchange rate. This would cause them to enter a more balanced trading field
among their major trading partners. Second, they need to introduce a sound banking reform program,
which would stabilize their domestic financial system. Lastly, China should relax their capital control
policies. This would assist them in avoiding financial crisis while simultaneously allow them to gain
more capital freedom
Balazs Egert and Amalia Morales-Zumaquero (2005) analyze the impact of exchange rate volatility
and changes in the exchange rate regimes on export volume for ten Central and Eastern European
transition economies. The first group of countries started their transition with pegged regimes and then
moved towards flexibility. The second group of countries experienced no major changes in their
exchange rate regimes in the past ten years. Their results indicate that an increase in the exchange rate
volatility decreases exports, and this impact has a delay rather than being instantaneous

Guillermo A. Calvo and Frederic S. Mishkin (2003) take on a different view of exchange rate regimes.
They argue that macroeconomic success in emerging market countries can be produced primarily through
good fiscal, financial, and monetary institutions, and they believe that less emphasis should be placed on
the flexibility of an exchange rate regime. They find that when choosing an exchange rate regime, not all
countries are able to conform to one type. This is due to each countries particular needs and their
economy, institutions, and political culture.

Zdenek Drabek and Josef Brada (1998) argue that the flexible exchange rate regime is applicable and
appropriate for six countries with transition economies. Within each of these economies, inappropriate
exchange rate policies have led to an increase in protectionism by these governments. Because of these
policies, the nominal exchange rate is not an indicator of comparative advantage; rather the true indicator
is the level of the real effective exchange rate. Drabek and Brada conclude that these transition
economies will have to eventually switch to a more flexible exchange rate in order to send more accurate
signals to both foreign and domestic investors about the comparative advantages of their country.

Refrences :
Brada, Josef and Mendez, Jose, “Exchange Rate Risk, Exchange Rate Regime and the Volume of
International Trade” Kyklos 41 (1988): 263-80.

Calvo, Guillermo A. and Mishkin, Frederic S., “The Mirage of Exchange Rate Regimes for Emerging
Market Countries” NBER Working Papers (June 2003).

Drabek, Zdenek and Brada, Josef, “Exchange Rate Regimes and the Stability of Trade Policy in Transition
Economies” WTO Economic Research and Analysis Division Working Paper (July 1998).

Egert, Balazs and Morales-Zumaquero, Amalia, “Exchange Rate Regimes, Foreign Exchange Volatility and
Export Performance in Central and Eastern Europe: Just Another Blur Project?” 8 Bofit
Discussion Papers (2005).

Fountas, Stilianos and Aristotelous, Kyriaco, "Does the Exchange Rate Regime Affect Export Volumes?
Evidence from Bilateral Exports in the US-UK Trade: 1900-1998," Department of Economics 43,
National University of Ireland, Galway (2003).

Hu, Fred, “Capital Flows, Overheating, and the Nominal Exchange Rate Regime in China,” Cato Institute
Conference April 8-9 (2004).

Levy-Yeyati, Eduardo and Sturzenegger, Federico, “Classifying Exchange Rate Regimes: Deeds vs.
Words,” European Economic Review, Vol. 49, Issue 6: Pages 1603-1635 (2005).

Nabli, Mustapha Kamel and Véganzonès-Varoudakis, Marie-Ange, “Exchange Rate Regime and
Competitiveness of Manufactured Exports: The Case of MENA Countries” World Bank (2002).

Rose, Andrew K., “One Money, One Market: Estimating the Effect of Common Currencies on Trade,”
Economic Policy (2000).