With traditional developed economies offering limited growth opportunities, more and more multinational companies are targeting investment in frontier markets – low income, high risk emerging economies that promise double-digit growth. Frontier markets like Myanmar, Mozambique and Rwanda may have distorted government policies, weak legal systems and low per capita income, but they also harbor the world’s largest untapped natural resources and have growth relatively independent of global trends. Investors can be categorized into four groups with different risk-return profiles and strategic considerations when investing in frontier markets.
Workhorses: small domestic firms face normal competition
Workhorse companies are small domestic firms selling to local customers across sectors like manufacturing, services, retail and agriculture. They employ the majority of workforce and compete based on differentiation, efficiency and marketing rather than government favors. Foreign companies can also operate successfully in this category through localization.
Cluster builders: exporters benefiting from low costs
Cluster builders are export-oriented firms, often suppliers to foreign MNCs, located in low-cost manufacturing or services clusters. Competition is based on price and quality rather than policy distortions. Examples include electronics manufacturers, garment producers and call centers.
Powerbrokers: large domestic firms in politicized sectors
Powerbroker firms serve domestic markets but operate in highly political sectors like telecom, infrastructure and energy distribution where profits are determined by government regulations. Foreign players need in-depth policy know-how to maneuver effectively.
Rentiers: concessionaries in natural resources
Rentier firms are exporters of natural resources whose terms and revenues are stipulated through government contracts. Enforcement tends to be weak resulting in environmental issues. Profits depend on operational efficiency and amount of rents extracted by government.
In conclusion, frontier markets contain pockets of high growth opportunities across both domestic and export sectors, often with less competition than major emerging markets. But risks related to policy distortions, weak legal systems and liquidity events need to be accounted.