Throughout the next few weeks, we will be taking a closer look at certain emerging markets and their impact on the global legal industry. Yesterday, we looked at the market indicators driving law firms to Brazil. Today, we turn our attention to Asia.
Virtually every report on the world economy points eastward towards Asia as the premier region that global businesses should focus on for growth opportunities. Very often these reports treat Asia as a monolith, not the complex and diverse region that it truly is. However, there are reports and surveys that paint a much more nuanced picture of the Asian economy.
A good example is a report published in March by the McKinsey Global Institute predicting that more than 20 of the world’s top 50 cities ranked by GDP will be located in Asia by the year 2025, up from only eight in 2007. And that by 2025, 136 new cities are expected to enter McKinsey’s list of the top 600 cities ranked by global Gross Domestic Product (GDP), all of them from the developing world, including 100 cities in China. This will have profound implications for companies’ growth strategies and the “key to tapping urban wealth in Asia” notes McKinsey, is to look at second-tier cities with populations of less than ten million.
Development in that second tier is astounding. In India, for instance, Bangalore, Ahmedabad, and Pune together will have as many households earning $20,000 a year in purchasing-power-parity terms as either Delhi or Mumbai by 2025. In China, 14 cities, including Wuhan, Xiamen, and Shantou, will have more households in this income segment by 2025 than either Beijing or Shanghai do today.
Understanding opportunities in these second-tier Asian cities will not be easy for companies. McKinsey acknowledges that “what you think you know about a country from your operations in its largest city may not apply in the second tier.” Companies might need to start from scratch, but nevertheless, they will need to make these cities a central part of their strategic plan if they want to grow their businesses.
The Asia Development Bank explained the sheer magnitude of growth in Asia in a recent report, entitled Asia 2050: Realizing the Asian Century, which seeks to develop a long-term vision and strategy for Asia’s “potentially historic rise among the global community of nations between now and 2050.” The bank predicts that if Asia continues on its current growth trajectory, it could account for more than half of global GDP in 2050, nearly doubling its current share.
The rapid rise of Asia over the past 4-5 decades has been one of the most successful stories of economic development in recent times. Today, as Asia leads the world out of recession, the global economy’s center of gravity is once again shifting toward the region. The transformation underway has the potential to generate per capita income levels in Asia similar to those found in Europe today. By the middle of this century, Asia could account for half of global output, trade, and investment, while also enjoying widespread affluence.
However, the report is also quite blunt in stating that “Asia’s rise is by no means pre-ordained.” Citing the region’s complexity and diversity, it warns that “Asia will need to sustain high growth rates, address widening inequities, and mitigate environmental degradation in the race for resources.”
Finally, a new report from Allen & Overy, the first in its three-part “50 Degrees East” series, looks at opportunities and challenges of doing business in the Asia Pacific region as compared to other countries around the world, both developed and developing. The report is based on in-depth interviews with over 1,000 business leaders from large international companies across 19 countries.
To the surprise of probably no one, three-quarters of business leaders interviewed agree that Asia’s economic influence is rising, easily surpassing all other major regions and in sharp contrast to Europe’s economic influence, which more than 22% said was in decline. Based on market size and growing consumer prosperity, China was cited as the top market with the best opportunities for growth, despite the fact that it was also considered one of the most difficult markets to enter, along with the U.S. and Russia. Legal and regulatory issues were cited as the main barriers to entry in these economies.
Underlying the report is data from Allen & Overy on Foreign Direct Investment (FDI): in 2005 developed economies received two-thirds of FDI inflows, while developing economies just one-third; in 2010, the ratio was closer to 50% each. With growth weak in Europe and the U.S., it is likely that capital inflows towards developing economies will continue. When asked to name the three markets that showed the best opportunity for growth, business leaders chose three of the BRIC economies, China, India and Brazil, in their top five list; three of the other countries rounding out the top ten were in Asia Pacific: Japan, Singapore and Australia.
However, some of the survey results are surprising. In particular, the notion that the BRIC economies are thought of only as targets for investment, rather than being investors themselves, is really quite simplistic, and not entirely accurate.
The traditional view of the BRICs also appears to have been turned on its head. Once viewed as the most attractive target markets for investment, they themselves have become major investors in other markets around the world with a collective 380% increase in their FDI outflows between 2005 and 2010. Maybe these emerging economies are less risk averse than their western counterparts and therefore less conservative about investing in regions such as Africa.
The second report in the series, just published, is on funding options preferred by business leaders, while the third report which focuses on major risk and regulatory issues will be published in November. So while it might be tempting to view Asia from a high altitude, business leaders would be wise to dig below the surface to fully understand the opportunities that will drive their success in the “Asian Century.”
Later this month, the Hildebrandt Institute and West LegalEdcenter will host a panel discussion as part of the 16th Annual Law Firm Leaders Forum, on competitive opportunities for law firms in emerging markets in Asia and South America. You can learn more about the forum here.
Posted by Marianne Purzycki