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.
QUEST FOR GLOBAL COMPETITIVE: ADVANCED VS. EMERGING ECONOMIES
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.
COMPETITIVE CHALLENGES OF THE 21ST CENTURY
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.
CONCLUSION AND IMPLICATIONS
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
TABLE 1 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). TABLE 2 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) TABLE 3 Location of Global Production for Leading Automakers 2000 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 2009 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) TABLE 4 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) TABLE 5 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 2010 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) TABLE 6 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). TABLE 7 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.|
|Date:||Jan 1, 2011|
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