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Advanced economies' competitive advantage under threat: are emerging economies catching up or forging ahead?


This paper examines the new trends in the global competitive landscape. In particular, it analyzes the impact of the growing economic power of emerging economies on the ability of advanced economies and their companies to sustain their current competitive dominance in the next few decades. Increasingly, an argument is being made that global competitive advantage may be shifting from advanced economies to emerging economies. This argument has been advanced by researchers from the Brookings Institution (e.g. Kharas, 2010; Lieberthal, 2010), and economists from Goldman Sachs (O'Neill, 2001; O'Neill & Stupnytska, 2009; Wilson & Purushothaman, 2003; Wilson, Kelston, & Ahmed, 2010). Also, business publications such as the Financial Times (Pilling, November 22, 2010), Morgan Stanley Capital International (Morgan Stanley, 2011), and Investopedia (2011), have been highlighting the considerable rise of emerging markets and the investment opportunities they offer. As a result, emerging nations are expected to become major economies that will rival today's developed nations.

The purpose of this research is to discuss the growing importance of emerging economies. In particular, the paper will evaluate whether emerging economies are simply catching up by closing the income gap that exists between them and the current major economic powers, or if they are slowly but steadily forging ahead as the most competitive nations of the next few decades.


Using The World Bank classification based on per capita income (The World Bank, 2011), this study will group countries into two categories: advanced economies, and emerging economies. Advanced economies are countries with a per capita income of US$12,275 or more (high income countries), and emerging economies are countries with a per capita income of US$12,275 or less (low to middle income countries). For both groups of economies, the discussion of the quest for competitive advantage can be done at the macro level (countries) and the micro level (companies).

Macro-Analysis of Global Competitive Advantage

Until the end of the twentieth century, the global marketplace was characterized by an overwhelming dominance of countries with advanced economies. As Table 1 shows, they accounted for 80% of world GDP in 2000. This is significant since only 20% of world population (International Monetary Fund, 2011) was estimated to live in these countries.

A comparative analysis of the largest economies highlights the preponderance of a few countries at the end of the twentieth century. The nations with the largest GDP were all among advanced economies and included the United States, Japan, Germany, France, and the United Kingdom (see Table 2). The United States had by far the largest economy. In 2000, the US GDP was almost $10 trillion, which represented close to a third (30.9%) of the world's total output. It is therefore safe to state that at the turn of the century, the United States was the economic powerhouse of the world. From 1980 to 2000, the United States and Japan (then the second largest economy) consistently increased their shares of the world economy. The other advanced economies with a large GDP were Germany, France, and the United Kingdom, although their shares slightly declined from 1980 to 2000.

After the year 2000, the global economic environment began to change. A number of low to middle level income nations started to emerge as significant players in the competitive arena. These new global players are now known as "emerging economies." Their percentage of their combined economies in the global output started to increase. From 20% of world GDP in 2000, the share of emerging economies rose to 24% in 2005 and then to a staggering 34% in 2010. This surge was primarily the result of a rapid growth of China's economy. In 1980, China accounted for only 1.9% of world economy, but by 2010, its share was approaching the 10% mark. China has now surpassed Japan as the second largest economy. The other major emerging economies were Brazil, India, Russia, and Mexico. During the first decade of the twenty-first century, BRIC economies (BRIC is an acronym for the following emerging economies: Brazil, Russia, India, and China) had made their mark on the global economy by contributing to over a third of world GDP growth (Wilson, Kelston, & Ahmed, 2010).

Two economic sectors, energy and transportation, can be used to illustrate how important emerging economies have become. According to a team of economists at BP (BP Statistical Review of World Energy, 2011), global energy consumption rebounded strongly and grew by an average of 5.6% in 2010, the highest increase in percentage since 1973. While energy demand from advanced economies grew by 3.5%, it increased by 7.5% in other regions, including China where energy consumption accelerated by 11.2%. The US had been the globe's biggest overall user of energy since the early 1900s until 2009. With its rapidly expanding demand for energy, however, China has surpassed the United States as the world's largest energy consumer (Swartz & Oster, 2010). In 2010, the Chinese share of global energy consumption reached 20.3%. The International Energy Agency (IEA) estimates that emerging economies will account for 93% of projected increase in global energy demand, as the economic activity of these nations is growing at faster rates (IEA, 2011).

The faster growth rate of economic activity that has resulted in higher energy demand from emerging nations also affected the global automobile industry. Until 2008, the largest producers of automobiles in the world were advanced economies (the US up to 2005, and Japan from 2006 to 2008). Based on production statistics from the International Organization for Motor Vehicle Manufacturers (known by its French acronym of OICA), in 2009, an emerging economy, China, surpassed both the United States and Japan as the nation where the highest number of motor vehicles were made (OICA, 2010). China also maintained its leading position in 2010. Besides China, three other emerging economies (Brazil, India, and Mexico) were among the top ten automobile producing countries in 2010.

Emerging economies do not yet have household brands of cars. It is instead major automakers from advanced economies that are diversifying the location of their production facilities by investing in emerging economies, as can be seen in Table 3. In 2000, large automakers such as Toyota, General Motors, VW, and Ford produced 60% or more of their vehicles in advanced economies. By 2009, however, these automakers had heavily invested in China (which had become the preferred location for General Motors' activities), Brazil, Mexico, and other emerging countries.

The automobile industry exemplifies a trend that is seen in several other industries. Leading companies from a variety of economic sectors have been increasingly investing in emerging economies. It is these investments, along with the rise of the middle class (Kharas, 2010), that were driving the consumption of energy in emerging countries such as China.

Micro-Analysis of Global Competitive Advantage

Besides GDP, the economic power of a country can also be measured by the number of its companies on the lists of the largest, and arguably the most competitive, companies in the world. There are several such lists, but this research uses the Fortune Global 500. Until the year 2000, 95% or more of companies on Fortune's list were from advanced economies. This suggests that firms from these economies had achieved a significant global competitive advantage.

The United States, the largest economy in the world (30.9% of global output in 2000), also had the most competitive companies. In 2000, it was home to 185 (37%) of 500 companies on the Fortune Global 500 list (Table 5 below). Not surprisingly, Japan came second with 104 companies. The other advanced nations with several companies on the list of the largest companies in 2000 were France (37 firms), Germany (34), and the United Kingdom (35). Most of these large companies were global corporations with operations throughout the world, including in several emerging nations.

In the last decades of the 20th century, firms from advanced economies expanded globally in an effort to sustain their competitive edge. Multinational corporations such as Coca Cola, McDonald's, General Motors, Sony, Toshiba, and Siemens invested in low to mid-level income countries of Asia and Latin America to benefit from location advantages (e.g. low labor costs and demand from rising middle class). As a result, their products became household names throughout the world.

Ironically however, foreign direct investments led to a transfer of managerial and technological know-how to host countries. For emerging economies, this transfer was significant since these skills would later support their development efforts. In addition, after the end of the cold war and the collapse of the Communist bloc, several developing nations started to look at developed countries as economic benchmarks. To develop, they realized that political, legal, and economic reforms were needed to facilitate the competitiveness of their companies and raise the standards of living of their populations. The transfer of technologies and managerial capabilities, coupled with the implementation of democratic systems and/or market mechanisms, laid the ground for the rise of globally competitive companies from emerging countries of Asia, Latin America, and Eastern Europe. The newly acquired managerial and technological know-how helped a growing number of firms from these countries create competitive advantage.

The rising competitiveness of firms from these nations can be seen on the Fortune Global 500 list. From 5% in 2000, the share of the largest companies from emerging economies increased threefold to 15% by 2010 (Table 4). This increase was driven primarily by a surge in competitive firms from China. The number of Chinese firms on Fortune Global 500 jumped from 12 in 2000 to 46 in 2010 (Table 5). With 61% (46 of 75 companies) of the largest companies from emerging nations in 2010, China had by far the most competitive companies within this group of countries. The other emerging economies (e.g. India, Brazil, Russia, and Mexico) still had significantly fewer companies that were globally competitive. But the trend (as illustrated in Table 5) suggests that companies from these countries are likely to become also global players. As more emerging economies take advantage of managerial and technological know-how transferred by multinational corporations' investments, it may be a matter of time before their firms start to challenge global competitors from advanced economies.


As a result of the growing power of emerging nations, the global economic environment is expected to go through significant changes. The rise of China and other emerging nations will have dramatic competitive implications.

Changing Global Competitive Environment

For very long, the world has come to rely heavily on the growth of American consumption. According to Kharas (2010), the structural force behind large US consumption has been a significant middle class. The middle class can be described by its main characteristics: a constant upscaling of lifestyle norms, the pervasiveness of conspicuous, status goods and of competition for acquiring them (Schor, 1999). Also, the middle class enjoys job security, stable housing, decent healthcare, educational opportunities, reasonable retirement, and discretionary income spent on vacation and leisure pursuits. The willingness of the middle class consumer to pay a little extra for quality is seen as a force that drives growth since it feeds investment in innovation, production, and marketing (Murphy, Shleifer, & Vishny, 1989). Kharas even made the argument that the spending power of the US middle class was a major driver of global economy.

Besides the United States, other advanced economies also have a significant middle class. Now that emerging countries are getting richer, their share of global consumer demand will increase. Kharas estimated that by 2015 the number of Asian middle class consumers will equal that of Europe and North America. China alone had about 150 million middle class consumers in 2010, but the number could top 670 million by 2021 (Kharas, 2010). Therefore, as emerging economies grow and the standards of living of their citizens rise, their middle class is likely to play a key role in global economy. The prospects that the middle class in China and a few other emerging economies may reach and even surpass that of advanced economies has led to the suggestion that major changes will occur in the global competitive environment.

Catching Up or Forging Ahead: A Theoretical Explanation

It remains to be seen whether companies from emerging economies will become dominant players in the quest for global competitive advantage. It is still possible that brain drain and entrepreneurship will help to revitalize the competitiveness of businesses from developed countries, particularly the United States. However, in the long term, two factors are likely to tip the balance in favor of increased global competitiveness of emerging economies. The first factor is the profound reforms taking place in emerging countries, and the second is these countries' population. As these countries transform their politic al, legal, and economic environments, their economies will be poised to converge towards those of developed countries. Economic convergence should take place because of the "catch-up hypothesis."

The catch-up hypothesis is based on the argument that in any long period, the economic gap across countries tends to close. The reason is because being backward carries a potential for rapid advance (Abramovitz, 1986). Specifically, high income countries' superiority in technology provides poor countries with a target to emulate, thus an opportunity for rapid growth (Nelson, 1991). The larger the technological gap between high and low income countries, the stronger the low income countries' potential for growth in productivity.

The catch-up hypothesis however makes on a major assumption. Convergence theorists maintain that for a rapid growth to occur, a backward country needs to have enlarged social capabilities. Social capability is defined as tenacious societal characteristics such as education system, and political and economic institutions (Abramovitz, 1986; Nelson, 1991; Luigi et al., 1998). Social capabilities are considered to be enlarged (or advanced) when a nation has an effective education infrastructure, a stable political environment, and a market economic system. Clearly, countries such as Brazil, Russia, India, China, and a number of other countries of Asia, Latin America, and Eastern Europe have for the most part achieved enlarged social capabilities. Based on the catch-up hypothesis, this study proposes that emerging economies that have achieved enlarged social capabilities are likely to achieve high economic growth rates until their per capita income levels converge towards those of advanced economies.

Indeed, as shown in Table 6, high GDP growth rates of emerging economies would lead countries such as China and India to experience an increase in per capital income that will, in the long-term, rival that of advanced economies. As their per capital incomes rise to the levels of advanced economies, these economies will catch-up. Interestingly, however, the catch up hypothesis suggests also that the growth rates of emerging economies would slow down once these countries' per capita income converges toward that of advanced economies. As a result, current emerging economies will not, on the basis of their per capita income, forge ahead when they catch up.

The second factor that may affect the global competitiveness of emerging economies is population. Based on estimates from the International Monetary Fund (IMF, 2011), about 80% of world population (6.8 billion people) lived in emerging and developing countries in 2009. But 44% (nearly 3 billion) were from five emerging nations. China, the most populous country, had more than 1.3 billion people. It was followed by India (1.2 billion), Brazil (193 million), Russia (140 million), and Mexico (109 million). It is worth noting that Indonesia had 234 million people. Of the world's 6.8 billion people, only about 1.1 billion were in advanced nations. Because of the size of their population, the most populous countries, particularly China and India, would forge ahead as far as their GDP is concerned. This is the argument made in Goldman Sachs' "BRIC thesis," as explained below.

Because of the rapid growth of China and other emerging nations, but particularly the size of their population, some economists (e.g. Pilling, 2010) believe that economic strength may be shifting from West towards East. These nations have already made their mark on the global economic landscape. BRIC countries contributed over a third of world GDP growth (Wilson, Kelston, & Ahmed, 2010). Citing a report from the Conference Board, the Wall Street Journal (November 10, 2010) asserted that China will likely surpass the U.S. as the main driver of the global economy in 2012.

In its long-term outlook for the global economy, researchers from Goldman Sachs (O'Neill & Stupnytska, 2009) predicted that by 2027 the GDP of China would be as big as that of the US. More importantly, their data suggested that by 2032 the combined GDP of BRIC countries would be as large as that of the G7 (G7 refers to the following seven major advanced economies: United States, Japan, Germany, France, United Kingdom, Italy, and Canada). Goldman Sachs' long-term outlook followed an earlier report (Wilson & Purushothaman, 2003) which stipulated that by 2050, Brazil, Russia, India, and China would be wealthier than most of the current major economic powers. This came to be known as the "BRIC thesis." The rapid GDP growth rates of emerging economies, coupled with the size of their population, lead this research to propose that emerging economies will forge ahead and take over the economic leadership of the world in the next several decades.


The purpose of this paper was to discuss the implications of the rise of emerging economies on global competitive advantage. The research suggested that emerging economies will grow much larger, because of two factors, the catch-up hypothesis, and the size of their population. China has already surpassed Japan to become the second largest economy in the world. Also, in the first decade of the twentieth century, the percentage of companies from emerging economies in Fortune Global 500 has been increasing. In the next few decades, as suggested by researchers from Goldman Sachs (O'Neill & Stunpnytska, 2009; Wilson, Kelston, & Ahmed, 2010), a few emerging economies will be wealthier than current leading advanced economies. As a result, emerging economies will not only catch up, but forge ahead of advanced economies. Subsequently, emerging economies' companies will play a significant, if not a dominant role in the global competitive arena.

The rise of emerging economies of Asia, Latin America, and Eastern Europe may have significant strategic implications. Multinational corporations from both the West and the soon to be Advanced East will seek to sustain their competitive advantage in new locations. Such strategic shift will present opportunities for emerging nations of the South. Newsweek, for example, sees a chance for Africa to become the new Asia (Guo, 2010). As incomes increase in leading emerging economies, global companies will redirect some of their foreign direct investments towards Africa which still has abundant and low cost labor. Also, the factors that two decades ago incentivized multinational firms to invest in Asia will transform the business environment in Africa. Those factors include entrepreneurship powered by the influx of returning skilled workers, the frenetic urbanization, and a big push in services and infrastructure (Majahan, 2009).


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Richard T. Mpoyi, Middle Tennessee State University
GDP for Groups of Countries

                                   Emerging and Developing
           Advanced Economies             Economies

Years   US$ (Billions)   % World   US$ (Billions)   % World

1980            8,163        76            2,544        24
1985            9,425        79            2,530        21
1990           17,669        80            4,511        20
1995           24,251        82            5,466        18
2000           25,694        80            6,533        20
2005           34,713        76           10,849        24
2010           41,531        66           21,378        34

              Total World

Years   US$ (Billions)   % World

1980           10,707       100
1985           11,955       100
1990           22,180       100
1995           29,717       100
2000           32,227       100
2005           45,562       100
2010           62,909       100

Source: Data retrieved from the International Monetary Fund online
database (April 2011).

GDP for Major Advanced and Emerging Economies

                             1980                  1990

                         US$         %         US$         %
Groups of economies   (Billions)            (Billions)

Advanced economies:
United States             2,788     26.0        5,801     26.2
Japan                     1,071     10.0        3,058     13.8
Germany                     826      7.7        1,547      7.0
France                      691      6.5        1,249      5.6
United Kingdom              542      5.1        1,018      4.6
Others                    2,245     20.7        4,996     22.8

Sub-Total                 8,163     76.0       17,669     80.0

Emerging economies:
China                       202      1.9          390      1.8
Brazil                      163      1.5          508      2.3
India                       182      1.7          326      1.5
Russia                      N/A      N/A          N/A      N/A
Mexico                      227      2.1          288      1.2
Others                    1,770     16.8        2,999     13.2

Sub-Total                 2,544     24.0        4,511     20.0

Total World              10,707    100.0       22,180    100.0

                             2000                  2010

                         US$         %         US$         %
Groups of economies   (Billions)            (Billions)

Advanced economies:
United States             9,951     30.9       14,658     23.3
Japan                     4,667     14.5        5,459      8.7
Germany                   1,906      5.9        3,316      5.2
France                    1,333      4.2        2,583      4.1
United Kingdom            1,481      4.6        2,247      3.6
Others                    6,356     19.9       13,268     21.1

Sub-Total                25,694     80.0       41,531       66

Emerging economies:
China                     1,198      3.7        5,878      9.3
Brazil                      642      2.0        2,090      3.3
India                       480      1.4        1,538      2.4
Russia                      260      0.8        1,465      2.3
Mexico                      672      1.9        1,039      1.7
Others                    3,281     10.2        9,368     15.0

Sub-Total                 6,533     20.0       21,378     34.0

Total World              32,227    100.0       62,909    100.0

Source: Data retrieved from the International Monetary Fund online
database (April 2011)

Location of Global Production for Leading Automakers


Companies           Location       Units (000)    %

Toyota                    Japan         4,151     70
                      US/Canada         1,103     19
                 European Union           178      3
                 Indonesia/Thai           169      2
                         Taiwan            81      1
                          Other           273      5

                          Total         5,955    100

General Motors        US/Canada         5,186     64
                 European Union         1,955     24
                  Brazil/Mexico           778     10
                      Australia           133      2
                          China            30      0
                          Other            51      0

                          Total         8,133    100

Volkswagen       European Union         3,769     74
                  Brazil/Mexico           935     18
                          China           316      6
                          Other            87      2

                          Total         5,107    100

Ford                  US/Canada         4,430     60
                 European Union         2,249     31
                  Brazil/Mexico           385      5
                          China            27      0
                          Other           232      4

                          Total         7,323    100


Companies           Location       Units (000)    %

Toyota                    Japan         3,543     49
                      US/Canada         1,190     17
                 Indonesia/Thai           721     10
                          China           601      8
                 European Union           435      6
                          Other           744     10

                          Total         7,234    100

General Motors            China         1,769     27
                      US/Canada         1,540     24
                 European Union         1,138     18
                  Brazil/Mexico           950     15
                    South Korea           532      8
                          Other           530      8

                          Total         6,459    100

Volkswagen       European Union         3,612     60
                          China         1,244     20
                  Brazil/Mexico         1,100     18
                          Other           111      2

                          Total         6,067    100

Ford                  US/Canada         1,629     35
                 European Union         1,660     35
                  Brazil/Mexico           579     12
                          China           446     10
                          Other           371      8

                          Total         4,685    100

Source: Data retrieved from OICA (International Organization for
Motor Vehicles Manufacturers) (2010)

Fortune Global 500 for Groups of Economies

                                      Emerging &
          Advanced Economies     Developing Economies

Years    # companies   % World   # companies   % World

1991 *          477        95            23         5
1995            490        98            10         2
2000            477        95            23         5
2005            455        91            45         9
2010            425        85            75        15

              Total World

Years    # companies   % World

1991 *          500       100
1995            500       100
2000            500       100
2005            500       100
2010            500       100

* In 1990, Fortune magazine redesigned its Global 500 list.
Source: Data retrieved from CNNMoney (2011)

Fortune Global 500 by Major Economies

                              2000                   2005

Countries             # companies       %    # companies       %

Advanced economies:
United States                185     37.0           170     34.0
Japan                        104     20.8            70     14.0
France                        37      7.4            38      7.6
Germany                       34      6.8            35      7.0
United Kingdom                35      7.0            39      7.8
Other                         82     16.4           103     20.6

Sub-Total                    477     95.4           455     91.0

Emerging economies:
Brazil                         3      0.6             4      0.8
Russia                         2      0.4             5      1.0
India                          1      0.2             6      1.2
China                         12      2.4            20      4.0
Mexico                         2      0.4             5      1.0
Other                          3      0.6             5      1.0

Sub-Total                     23      4.6            45      9.0

Total World                  500    100.0           500    100.0


Countries             # companies       %

Advanced economies:
United States                136     27.2
Japan                         71     14.2
France                        39      7.8
Germany                       37      7.4
United Kingdom                29      5.8
Other                        113     22.6

Sub-Total                    425     85.0

Emerging economies:
Brazil                         7      1.4
Russia                         6      1.2
India                          8      1.6
China                         46      9.2
Mexico                         2      0.4
Other                          6      1.2

Sub-Total                     75     15.0

Total World                  500    100.0

Source: Data retrieved from CNNMoney (2011)

Five-Year Average GDP Growth Rates (In %)

Economies             1981-1985   1986-1990   1991-1995

Advanced economies:
United States             3.29        3.25        2.52
Japan                     4.28        5.01        1.41
Germany                   1.18        3.45        2.15
France                    1.59        3.27        1.16
United Kingdom            2.20        3.33        1.66

Emerging economies:
China                    10.78        7.92       12.28
Brazil                    1.20        2.09        3.10
India                     5.23        5.95        5.00
Russia                     N/A         N/A         N/A
Mexico                    2.02        1.84        1.77

Economies             1996-2000   2001-2005   2006-2010

Advanced economies:
United States             4.30        2.40        0.96
Japan                     0.97        1.31        0.18
Germany                   2.01        0.56        1.18
France                    2.82        1.63        0.75
United Kingdom            3.44        2.50        0.36

Emerging economies:
China                     8.62        9.76       11.20
Brazil                    2.02        2.80        4.41
India                     6.18        6.51        8.57
Russia                    1.77        6.13        3.61
Mexico                    5.45        1.55        1.86

Source: Data retrieved from the International Monetary Fund online
database (April 2011).

Per Capita Income for Leading Economies (IN US$)

Economies              1980      1990      2000      2010

Advanced economies:
United States         12,249    23,198    35,252    47,284
Japan                  9,172    24,774    36,800    42,820
Germany               10,759    19,610    23,220    40,631
France                12,865    22,017    22,574    41,019
United Kingdom         9,630    17,782    25,142    36,120

Emerging economies:
China                    205       341       946     4,382
Brazil                 1,372     3,464     3,751    10,816
India                    263       378       460     1,265
Russia                   N/A       N/A     1,775    10,437
Mexico                 3,353     3,458     6,859     9,566

Source: Data retrieved from the International Monetary Fund online
database (April 2011).
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Author:Mpoyi, Richard T.
Publication:Competition Forum
Article Type:Report
Geographic Code:0DEVE
Date:Jan 1, 2011
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