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It's No Time to Give Up on Emerging Markets

These are challenging times for emerging markets. China's economy is expanding at the slowest pace in more than a decade, and annual growth in once-booming nations like Brazil, Mexico, Russia, and South Africa has slowed to about 1.5 to 2.5 percent. Look around the developing world, and currencies are weakening, worries about asset bubbles and rising debt are mounting, and foreign direct investment has fallen sharply. This volatility leaves many companies wondering if they are overexposed to the risks of emerging markets.

The challenges in emerging markets go beyond volatility. Fundamental, longer-term changes are transforming the competitive landscape. In most emerging markets, domestic companies with low cost structures and intimate knowledge of local consumers are more aggressive and are quickly improving their operations. Competition for increasingly scarce talent is fiercer and is driving up labor costs. Such trends are hurting profits. In China, for example, the share of U.S. companies reporting that their operating margins were higher than the global average dropped from about 50 percent to just over 30 percent between 2010 and 2013, according to the American Chamber of Commerce in Shanghai.

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