Frontier Economies Soon to Take the Lead in Economic Growth

A Frontier Economy is defined by Wikipedia as a type of developing country which is more developed than the least developing countries, but too small to generally be considered an emerging market. Unlike emerging market giants like China, Brazil, and Russia that are expected to see slow-downs in the near future, these smaller frontier economies are expected to thrive.

What characterizes a Frontier Economy?
According to the Harvard Business Review, there are three things that help to characterize a Frontier Economy:

1) Corruption – One thing that all Frontier economies have in common is that their industries are driven by political motives as opposed to actual innovations. Such corruptions may include blacklists (a list of companies excluded from trade), black markets (illegal trades), bribery, corrupted campaigns, collision, overpriced goods, phantom job markets, and so on and so forth.

2) Failed Prosperity – Countries listed as Frontier economies cannot be depended on to provide prosperity or wealth for their citizens. In order to be classified as a Frontier economy the country must a) have an annual per capita income of below $1, 500 or b) experienced a 20% drop in GDP per capital in the last 6 months, or c) both.

3) Unaccountable Enforcement – In Frontier economies, leaders have all the power. There is no strong enforcement of rules and regulations for leaders, and they can bend them however they please to fit their own desires and needs without any consequence.

A world of corruption, failed prosperity, and unaccountable leaders might not sound like the desired place to lead a business, but many people are starting to stray away from market giants, and set up base in these frontier economies. In other words, these low income, high risk countries are quickly becoming the desired area to sell goods and set up exportation business.

Yes, this comes along with great risks. Those who take their business to frontier markets face the risk of running into unstable and fragile systems that can lead to rapid declines in market values, failing trades, currency limitations, and so on and so forth. With that being said, it seems that many companies are overlooking the risks, and continue to shift their focus from emerging markets to frontier economies.

Frontier economies like Mozambique, Rwanda, Vietnam, and Myanmar, for example, are all on the list of the top 25 countries that are expected to see substantial growth in the next five years. In fact, of the 25 countries on the list, a whopping 19 of them are frontier markets. And as people continue to invest in the untapped resources of these countries, such as mineral and metals, global investment, income, and growth are all expected to boost, and those who move their business early on in the game can expect better returns on their investments.

So how do you know where opportunity arises? There are two main factors that need to be examined to determine whether or not a frontier market is worth the investment. Firstly, you must look at how profit is driven. This relates to our number one characteristic of frontier markets as listed above. Are profits determined by the level of competition between businesses? Or are they driven by political agendas? Secondly, you must determine whether the industry is focused more on domestic sales or exports.

There are four different categories that an industry could fall into:

1) Workhorse industries – These industries often include firms like service providers, local manufacturers, and small farms. They involve small companies that sell to domestic consumers, and that compete with one another by differentiating their products, searching for new ways to be more efficient, and investing in marketing development. In such economies, workhorse firms make up the majority of the labor force.

2) Cluster builders – These industries often serve developing markets, and companies within them often compete with one another through export. The term “cluster builder” comes from the concept that, in such industries, similar businesses often cluster together in the same area to take advantage of things like cheap labor and lowered costs of production. Industries within cluster building markets compete with one another based on price and quality, and therefore benefit from clear cut and stable enforcement of rules and regulations. You may find a variety of clothing manufacturers, electronic companies, and call centers within cluster building markets.

3) Powerbrokers – These industries are similar to those of workhorse industries, but instead of driving sale through competition and product differentiation, operations are often controlled by political influence and privileged interests. Falling into this category would be utility companies, gasoline distributers, and power plants.

4) Rentiers – This is the type of the market is where you will find low quality, bottom of the line businesses that focus solely on how they can cut costs and reduce overhead. Businesses within this type of industry are often in contractual obligations with the government, and operate in a space where rules and regulations are not highly enforced. Oil, gas, and mineral producers often fall within this category, and create a space where there are safety concerns and environmental hazards.

It’s important to understand, however, that not all companies fit into one clear cut category. Some may operate based on rentiers standards, but may also dip their toes into workhorse standards. In addition, many companies operate in more than one country, and the category by which they fall into differs based on which country they are in. Someone may, for example, operate under rentier standards in Vietnam, but in powerbroker standards in Kazakhstan.

Once you have mapped your industry into one or more of the 4 categories above, you can gather a clearer picture as to where the best opportunities lie for your business.