An emerging market economy can be understood as an economy in a stage of transition—one moving away from the rationale of closed isolationism and embracing an open market. Traditionally, emerging market economies are those which move rapidly from being closed off from the world to those with drastically reformed economic development programs. Examples of such economies are varied and include countries such as the former Soviet Union, Brazil, India, China, the Czech Republic, South Africa, Pakistan, and Vietnam. [See BRIC]
Emerging market economies can be characterized by a number of things, including an increase in investment activity. The addition of foreign currency into an emerging economy is integral to the continued growth and development of such an economy.
Foreign investment is of benefit to both the emerging economies and to investors. For the emerging economy, foreign investment signifies an international interest in the natural resources and increased productivity of the market in question. For the investor, the interest of foreign businesses and governments notes the increasing stability of the market in question and a potentially beneficial investment opportunity.
Although the injection of foreign currency into emerging economies results in the developing stability of that market, there is a degree of risk inherent in emerging market economies. As such, you should seriously consider whether you are willing to take on the added risk of such an investment.
There is always the possibility that an emerging market could relapse into a state of conflict brought on by regional, political, or religious interests. However, many of the disadvantages of the increased risk inherent in such an investment are outweighed by the varied advantages that are available to you.
Investment in emerging economies has become a favorite of corporations looking to avoid the increasingly stringent IRS regulations. As such, you would be privy to the tax advantages that go hand in hand with a foreign investment. Such advantages include generous tax rates that are designed to entice you as an investor, while providing the market in question with foreign capital with which it can further develop its economy.
As you consider whether investing in emerging economies is the right direction for your portfolio, it would be wise to consider some of the more successful emerging markets in the world. Of the countries mentioned above in the first paragraph, Brazil, Vietnam, China, India, and Pakistan each have a unique characteristic.
As these markets are in a sense more developed than many others, they have increasingly sophisticated infrastructure to accommodate the facilities needed for foreign investment. As such, you should look particularly closely at markets such as these as they do not require huge expenditures of capital to merely enter the market.
As a whole, emerging economies present a uniquely challenging investment opportunity that presents both moderate risk and the chance for financial success. You should seriously consider the risks inherent in such an investment and decide whether it is the direction you would like your portfolio to take.
For the right individual or organization, well educated and versed in both the risks and rewards of such an investment, an emerging market economy might be a good choice to consider as part of a sound portfolio diversification strategy.