By Ben Botes, Joint CEO Caban Capital PLC - www.cabancapital.co.uk
Often times, we imagine that innovation tends to trickle-down from companies in countries such as the United States, Europe, and Japan. But the days of rich countries’ controlling innovation may be numbered. Many emerging markets in the developing worlds are full of fertile research and development for companies in any market, and breakthrough ideas from entrepreneurs in these markets are likely to create great opportunities for investors.
Innovations from these emerging markets are ideally suited for start-ups – they’re typically homegrown and are a creative solution to a problem focused on that specific market. And since they’re usually within a developing country, they often don’t require a lot of resources to get started, however, they will need them to grow, which is where outside investors come in. Many emerging market entrepreneurs are looking for alliances to get their start-ups off the ground, and are very eager to partner up with outside investors.
So how can you identify an emerging market opportunity that’s worth investing in? It may not be down to just spotting a great investment opportunity, but in fully understanding the challenges that come with investing within these emerging markets.
The vast potential within these markets is a great cause for enthusiasm among investors, however these markets are destined to be challenging. Geographically, these markets span the globe and possess vastly differing economic and political conditions that investors need to put into consideration when deciding where to invest. And within each of these regions, there is even more differentiation in terms of overall business climate and growth potential.
To simplify which aspects of emerging markets investors should consider when deciding which opportunities to invest in, there are five frameworks to consider: political and social systems, openness, product markets, labor markets, and capital markets. By focusing on both these macro and micro market factors, investors will be able to better understand the differences between their own home countries and those in developing countries. Additionally, investors will be able to better recognize how the shape of each market and how well an opportunity will succeed within each market.
For example, while countries like China, Brazil, and India most certainly possess immense resources, in many ways they still hold a handful of challenges for those looking to invest in their markets. If you look at Africa, then South Africa, Kenya, Ghana and Nigeria falls into an equally attractive frame. Economies in these countries have a high disparity of wealth between city and rural areas, with poor domestic infrastructure limiting evenly-distributed growth, inadvertently directing even further investment and development into many mega-cities. Additionally, other issues such as weak institutions, personal safety and corruption continue to make it difficult for investment opportunities to get off the ground.
However, these challenges shouldn’t deter you from investing in emerging markets. Today, the economic clout of emerging markets is no longer in question. A profound transformation of economic fortunes is undeniably taking place that will affect the nature of these markets and competition for years to come, and is creating exciting opportunities for outside investors.
Deciding which emerging market is best suited for your investment requires a broad analysis of numerous factors, both internal and external, which is normally required when investing in any market. Factors like scale economies, entry barriers, and the ability to differentiate products matter in every industry; it’s simply the weight of their importance which varies from place to place. While emerging market opportunities do come with a unique set of challenges not found in more developed countries, if investors understand, anticipate and work alongside these challenges, they can find themselves with long term prospects and success not easily found within more developed countries. Only once investors analyze and understand a market’s institutional context can they then properly analyze an investment opportunity’s potential.