What is an emerging market? Currently, there is no universal definition of this term. According to the Morgan Stanley Capital Index (MSCI) equity index, there are 58 emerging and frontier markets (EM). On the other hand, the International Monetary Fund’s (IMF) index comprises 155 EM or “developing” countries based on measures related to the social environment. Regardless of the number, there is a thread that runs through common understandings of such countries: they possess markets with endemic wealth, underdeveloped infrastructure, and economic dependence on the developed world. Provided by the developing, peripheral countries. Although geopolitical and economic experts would acknowledge that this two-dimensional background is obsolete, many portfolio and direct investors rely on them when making strategic decisions.
Below, I explain in greater detail the disconnect between common perceptions and realities of emerging markets using examples from East Asia and West Asia.
Misperception-Stereotype #1: Emerging markets are supplemental to core industrialized economies.
Reality: Emerging markets collectively contribute over 55% of global GDP (IMF, 2024). China, India, Brazil, and Indonesia are among the biggest contributors, and some of the fastest-growing economies are in emerging markets.
In the specific context of FDI, the stereotypes are made much worse by the fact that many important decisions are made based on them. To understand the real risk exposures of an FDI project, we need to examine the institutions in the specific host country. When you say that something is institutional, you are saying that it is the core or the true nature of the person or thing you are describing.
Misperception-Stereotpye #2: Changes in government leadership are the best metric of legislative change in East Asia
East Asia has experienced a significant number of leadership changes in the past 5–7 years. Consequently, some inbound investors have expressed concern about expanding to the region because leadership changes mean policy changes. This is of great concern to inbound investors because they fear that policy changes after the inception of a project will cost millions of dollars to correct.
Reality: In East Asian countries, arbitrary legislative changes that are driven by self-interest in the short term are best checked by a system that has a strong separation of powers. To draw investor attention at the World Economy Forum to be more accurate, institutional metrics of policy instability, Nomin Chinbat, Mongolia’s Minster of Culture, Sports, Tourism, and Youth- referred to the country’s excellent score on constraints on government powers in a recent interview in Davos.
According to the rule of law rankings by the World Justice Project, Mongolia’s constraints on government powers ranking is 37th out of 142 countries that are measured in the report. Minister Nomin Chinbat further explained that foreign investors in the mining space are eager to establish operations in Mongolia because of the country’s reserves of natural resources and its strong rule of law scores. When asked about government changes in the region, she elaborated on the country’s commitment to stable policy frameworks: “Even though the Mongolian People’s Party (MPP) won a simple majority of seats in June of ’24 and did not need to share legislative and executive power with other parties, it voluntarily established a coalition with the Democratic Party (DP) and the National Labour Party (HUN Party). This coalition, along with the favorable ratings in the separation of powers, demonstrates that investors enjoy the resilience of our investment climate and are not driven by the cursory assumptions about the region.”
Misperception-Stereotypes # 3: Political violence always creates a regional ripple effect.
Some uninformed investors inaccurately associate the autonomous region of Kurdistan (Kurdistan Region) with the weak institutions and political violence of Iraq. International media often focus on Iraq’s crises but do not always differentiate the more stable investment climate in the Kurdistan Region.
Reality: Inbound companies that take the time to examine investment climates soon learn that the Kurdistan Region has autonomous governance institutions. The stability of the investment climate is best reflected in the significant number and types of investments that it has attracted over the last 19 years. In an interview at the World Economic Forum, Mohammed Shukri, Chairman of the Kurdistan Region’s Board of Investment, explained, “Since 2006, we have facilitated 1,431 investment projects, with a total capital of $75 billion—$12 billion of which stems from foreign direct investment and joint ventures. The Kurdistan Region has seen a steady increase in investment projects in recent years: 96 in 2022, 155 in 2023, and a remarkable 183 in 2024, with the manufacturing sector leading the charge.”
Decision-makers who are managing FDI projects must refrain from being driven by stereotypes. Each project and each country brings a unique risk exposure and the success of the project depends on the extent to which investors understand and adapt to it.