Economic Development: Investment in Advanced vs Emerging Economies

This report provides a comprehensive analysis of advanced and emerging economies, focusing on their key differences and investment potential. It begins by defining and differentiating between advanced economies, emerging markets, and low-income developing countries, referencing classifications by the International Monetary Fund (IMF) and the World Bank. The report highlights the significance of Gross National Income (GNI) per capita as a key indicator, along with other factors such as market structures and integration into global financial systems. It explores the evolution of the term “emerging markets” and discusses the criteria used to classify countries, including income levels and export diversification. The report also examines the characteristics of Low Income Developing Countries (LIDCs), emphasizing their structural features and limited financial linkages. The conclusion draws upon the information presented to offer a comparative overview of the investment landscapes in advanced and emerging economies, providing a foundation for informed decision-making in international business. The report also includes a bibliography of the sources used.

1. Introduction
International business often requires making crucial decisions regarding where to invest, how to
invest and when to invest. The current scenario of the world economy presents an increasing
dilemma on whether investment in emerging and developing countries is preferable to
investment in advanced economies.(Chakravarty 2016)
Advanced economies offer developed markets and “have highly developed capital markets with
high levels of liquidity, meaningful regulatory bodies, large market capitalization, and high
levels of per capita income” and are generally considered as safe bets for investment.(NASDAQ,
USA 2012). On the other hand, “emerging markets” also often referred to as developing
countries are countries that are growing at a fast pace but have “less mature markets”.
(NASDAQ, USA 2012) Emerging markets offer opportunities for the future but tend to be
volatile due to under-development of economic and political structures.(Balliet 2017)
The “differentiated” levels of advancement country could be due to many reasons. (Samuelson
and NordHaus 2004)have described four major aspects of development, Human Resources or
Human Capital, Natural Resources, Capital Formation, and technological development that
determine the level of advancement of a country or whether a country can be called as an
advanced country or a developing country. Advanced economies score well on most aspects of
development, while emerging or low income could score low on several or all aspects of
development.(Samuelson and NordHaus 2004)
However, the actual classification of countries as advanced, emerging markets or low income
developing countries is by and large based on per capita income and their market structures.
2. Categorization of Economies Based on Level of Development
The International Monetary Fund uses the following criteria to classify countries into Advanced,
emerging markets and developing economies. These criteria are
a) Income Per Capita or the average individual income b) Diversification of Exports c) the
level of integration of the country into the global financial systems.(International
Monetary Fund 2017)

The World Bank simply classifies economies based on their Gross National Income Per Capita
and these classifications are used by the International Monetary Fund to decide whether a
country is a “advanced economies” or “emerging market and low income developing countries”.
There are several methods to calculate the average individual income. However, one of the most
common ones is Gross National Income (GNI) per capita. According to World Bank ,“GNI per
capita is the gross national income, converted to U.S. dollars using the World Bank Atlas
method, divided by the midyear population.”(The World Bank 2017) In 2016, Low Income
Developing Countries were defined as “Countries with a Gross National Income Per Capita of
$1025 or less”, lower middle income countries were those with “GNI per capita of $1026 and
$4035”, upper middle income countries were “those with a GNI per capita between $4036 and
$12, 475” , and high income countries were countries with “GNI per capita of 12, 476 or more”.
(The World Bank 2016)
The IMF classifies 39 countries as advanced economies. These countries do not include some
countries like Saudi Arabia that have high per capita income but lack diversity in export while
some countries which do not necessarily have the highest levels of individual income are
classified as advanced economies simply due to their advanced and integrated market structures.
For example, Lithuania is included in the list of advanced economies due to its adoption of the
Euro. Advanced economies are economies in the stages of post industrialization. (International
Monetary Fund 2017)
The term “emerging markets” was first coined by Antoine van Agtmael in late 1980s to refer to
the so called “third world countries” that were relatively poor but offered opportunities to
investors as their stock markets were developing.(International Finance Corporation 2017) Since
then, the term has been evolved and been loosely used without any formal criterion for
definition.(Balliet 2017) However, the International Monetary Fund publishes a list of “emerging
market and developing economies” (including Low Income Developing Countries) that contains
all those countries that are not classified as advanced economy countries. According to the
World Economic Outlook of 2016, 152 countries were classified as emerging market and
developing countries.(International Monetary Fund 2013)
The “emerging market and developing countries” are often referred to as “Low Income
Developing Countries” (LIDCs). Low Income Developing countries are countries that would

generally have a low per capita income. However, market structures are also an important
characteristic to classify a country as an LIDC According to the International Monetary Fund,
LIDCs have “structural features complete with limited development and structural
transformation, and insufficiently close to external financial linkages to be widely seen as
emerging market economies”.(International Monetary Fund 2013). According to the World
Economic Outlook published by the IMF in 2016, the threshold of income set by the
International Monetary Fund for a country to be classified as Low Income Developing Country
was $2700.(International Monetary Fund 2017)
Bibliography
Balliet, Wade (2017). Emerging market complexities. [online]. Last updated 6th January.
https://www.worldfinance.com/banking/emerging-market-complexities
Chakravarty, Manas (2016). Advanced economies vs emerging markets. [online]. Last updated
26 October. http://www.livemint.com/Opinion/ck1EMSGaPQvksrMeC45QsI/Advanced-
economies-vs-emerging-markets.html
International Finance Corporation(2017). Establishing 'Emerging Markets' [online].
http://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/
about+ifc_new/ifc+history/establishing-emerging-markets
International Monetary Fund (2017). Frequently Asked Questions: World Economic Outlook
(WEO). [online]. Last updated 10 October.
https://www.imf.org/external/pubs/ft/weo/faq.htm#q4b2
International Monetary Fund (2013). Statistical Appendix. [online].
https://www.imf.org/~/media/Websites/IMF/imported-flagship./_statapppdf.ashx
NASDAQ, USA (2012). http://www.nasdaq.com/article/what-is-the-difference-between-a-
developed-emerging-and-frontier-market-cm140649. [online]. Last updated 11 May.
http://www.nasdaq.com/article/what-is-the-difference-between-a-developed-emerging-and-
frontier-market-cm140649

Samuelson, Paul A and NORDHAUS, William R. (2004). Economics: Seventeenth Edition. 2002
ed., New Delhi, Tata- McGraw Hill Publishing Company. ISBN0-07-048645-X,
The World Bank (2017). GNI per capita, Atlas method (current US$). [online]. Last updated 15
September. https://data.worldbank.org/indicator/NY.GNP.PCAP.CD
The World Bank (2016). New country classifications by income level. [online]. Last updated 01
July. https://blogs.worldbank.org/opendata/new-country-classifications-2016