Capital Investments in Emerging Markets
Table of Contents
Emerging markets have been increasingly attractive investment areas to many capital investors for various reasons. Apparently, the most popular reason for investing in emerging economies is their promise of rapid economic growth compared to that of developed economies. For the better part of the century, capital investors have progressively invested in emerging economies since the early 2000s. However, those who benefited more from the rapid economic growth were those who took the risk early enough and invested in these markets. Their returns from emerging markets provided the rationale for investing in the same areas by other investors. Starbucks is a leading coffee products firm, not only in North America, but globally. The company took the earliest opportunity to expand its footprint by investing in emerging economies such as Japan, China, and Singapore and established there as a global provider of premium coffee products Even today the company has plans for investing more in such economies because of the growth opportunities their future promises. As a global strategy, the company relies on strategic partnerships and acquisitions. With this, the firm expects to venture into emerging economies by taking advantage of established value chains of existing companies and their partners (Starbucks Conference, 2014). This paper presents a methodology, assessment as well as evaluation of Starbucks global investment portfolio, investigates managerial impacts and benefits from investments by Starbucks, and how they provide a competitive advantage for the firm.
ETOP Methodology for Investments in Emerging Markets
It is apparent that most investments in the emerging economies from the early 2000s to date have been primarily caused by the promise of fast economic growth otherwise associated with more returns. There is no doubt in what indexes showed – emerging economies have been growing faster than developed economies (Davis, Roger, & Liqian, 2009). This is an attractive and at the same time elusive reason to invest in emerging economies. Like other companies in various industries, Starbucks also has investment plans for EM and uses strategic acquisitions and partnerships to penetrate into these markets.
It may seem absurd for Starbucks to invest in EM based solely on the potential for faster growth compared to developed markets. Of course, it is clear that investment decisions of Starbucks are linked to such trends as increasing disposable income among middle and upper classes in EMs, and cheap production available in these economies. These factors are expected to result in faster economic growth and thus attract investments. However, research has shown that, contrary to common belief, fast economic growth may not be a good reason to base all capital investment plans on. This is because companies are likely to invest more in growth stocks for the expected huge returns when these stocks do not have the same prospects over long holding periods as value stocks. Research has established three main aspects that influence the relationship between economic growth and returns on stock. These include actual growth as compared to expected market growth, the composition of and capital claims made on the GDP of the country in question, and the price that investors will have to pay for the growth expectations at any time of the investment period.
Eventually, the above observations call for a modest way of making investment plans by Starbucks for its global portfolio especially for EMs. Market volatility is almost inescapable in EMs because of trends in the past; the fast economic growth in the early 2000s came to almost a standstill in the wake of 2008 economic downturn before beginning to rise steadily thereafter (Davis et al., 2009). Even today, the economic growth of BRIC (Brazil, Russia, India and China) continues to edge ahead of developed economies, but there are concerns over possible diminishing returns due to high volatility. Emerging Markets Total Opportunities (ETOP) is an investment methodology that allows a firm to invest in diverse portfolios to withstand the market volatility of EMs. This methodology was developed by Capital International, Inc. for those of its clients who wanted to make investment plans for EMs, but with less volatility on their returns (Capital Group, 2015). With ETOP investment in emerging markets takes an approach of a diversified global investment portfolio that encompasses investment in both areas of short-term and long-term returns. Therefore, instead of investing solely in growth stocks, Starbucks should also consider investing in value stocks to tap into the potential of long-term economic growth. Moreover, value stocks will give more returns in the long run due to lower price Starbucks has to pay for such expected returns compared to growth stocks, which offer high returns, but the firm equally pays a high price for the returns.
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Rationale for ETOP
There is a variety of security in which Starbucks can invest. Before making such investment decisions though, the company must assess the trade-offs of investing in growth and value stocks. Such assessment is best done at both a country and business level. At a country level, Starbucks will have to estimate the debt-to-equity ratio of the country in question, while at a company level, it must assess and analyze the capital structure of its strategic partners as well as acquisitions. A robust capital structure will help to cancel out the negative trade-offs of different kinds of investment security and enable Starbucks to endure market volatility.
Impact of Inflation
Inflation is defined as the increase in prices of goods and services over an extended period of time, often with no benefits for the investor or producer. These advancements may mean that Starbucks will have to invest more in the factors of production such as labor, but with diminishing returns on the investments. As such, the value of investments deteriorates over time, leading to losses in the long-run and even possible ousting of the firm by its competitors when it can longer stand up to competition. Developing a holistic approach to making investments, explained in the methodology presented earlier, is a good strategy to choose. This approach takes into consideration how the economic apparatus of a country would impact capital investment as well as how partners and acquisitions Starbucks has will affect the firm’s investment through its capital structure.
The implications of this knowledge for management’s decision-making is that capital investments will be made based on a complete assessment of actual growth of a country’s GDP and partners’ and acquisitions’ robust capital investment structure. This should be help to mitigate market volatility while enabling Starbucks to reap benefits from both short-term and long-term investment returns (Strategy Insights, 2015). It is apparent that this will improve the overall stability over different economic cycles in the global economy.
Investment Modifications in North America versus Emerging Economies
It is clear from the preceding discussion that investment decisions for emerging markets based solely on economic growth may turn out to be catastrophic. There is a need to diversify the capital investment portfolio for these economies, and it starts with a proper assessment of both country’s debt versus equity investments as well as individual companies’ capital structures. A special adjustment is thus required to make short-term capital investments in growth stocks to tap into higher economic growth rate in EM, compared to the developed economy of North America. Similarly, while investing in North America, Starbucks should consider making more investments in value stocks because of relatively stable economic growth trend, as opposed to highly unbalanced economies of developing countries (Davis et al., 2009). However, since more corporate earnings are made abroad, Starbucks management can use this information to expand its footprint in emerging markets using its strategic partnerships and major acquisitions to gain from the markets. This will help the company to acquire more earnings from abroad and gain a competitive advantage over its global competitors.
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Benefits of Sensitivity Analysis for Starbucks
The two benefits that accrue to a firm using sensitivity analysis in evaluating its investment projects are proper risk profiling and management of risks through risk hedging strategies. Risk profiling enables Starbucks to do an in-depth analysis of the risks involved in any investment decision, whether in local markets or global markets. With a clear understanding of the risks involved, the firm may adopt three hedging strategies. Firstly, the company may ignore the risk and do nothing about it, while letting it pass to investors in the business such as stockholders. Secondly, the company may protect itself from danger using a variety of applicable approaches. Thirdly, the firm may decide to expose itself more to the risk because of its perceived competitive advantage over its competitors.
Sensitivity analysis is the basis of risk management and thus gives Starbucks a competitive advantage by enabling it to measure risk exposure and thereafter develop appropriate qualitative approaches to managing such investment risks. The firm will profit from tax benefits that will accrue to it through risk hedging as well as take better investment decisions by examining both expected returns and additional costs of managing risks (Capital Group, 2015).