The increasingly interconnected nature of the global economy has been one of the dominant business trends over the past 50 years. But a number of recent developments, from increased protectionism in the US, to the pandemic, and Russia's invasion of Ukraine, have threatened to throw the process of globalization into reverse.

Over the last few decades, several emerging market nations – most notably, China and India – have been major beneficiaries of Western companies' moves to outsource operations ranging from manufacturing to customer service activity to reduce costs and increase efficiency.

Supply chain resilience and remote working

Over the last few decades, several emerging market nations – most notably, China and India – have been major beneficiaries of Western companies' moves to outsource operations ranging from manufacturing to customer service activity to reduce costs and increase efficiency. But the pandemic, in particular, has highlighted the potential vulnerabilities of long-distance supply chains, which were hit between 2020 and 2022 by factory closures across Asia, shipping delays and worldwide labor shortages. This has driven interest in nearshoring, where goods are produced or materials obtained with greater proximity to end markets, where they're sold. Meanwhile, the ongoing tension between the US and China over semiconductor production has been another catalyst for firms in the technology sector and other advanced manufacturers to reconsider their existing procurement practices.

Elsewhere, COVID-era trends, such as the rise in remote working, have leveled the playing field to some extent regarding the expense associated with providing certain services. For example, India-based IT services firms may no longer have such a significant advantage in terms of cost, given that companies in Europe and North America have been able to reduce their need to pay for office space for local staff.

Opportunities for emerging markets

However, such developments are not necessarily negative for emerging markets, and investors can expect to see many new opportunities created as these trends play out. Recent experiences in Mexico are a prime example: as US-based vehicle manufacturers look to increase the resilience of their supply chains and bring production closer to the North American market, the motor industry in Nuevo Leon has expanded rapidly. This has helped Mexico overtake China and Canada as the US's most important international trading partner. It's also driving growth in Mexico's airports, banks and real estate companies.

Meanwhile, China's zero-COVID policy and the rolling lockdowns that continued into the second half of 2022 have prompted numerous major conglomerates in Japan and South Korea to reassess their dependence on Chinese manufacturing and shipping hubs, and turn their attention to other emerging market countries, such as Vietnam and Indonesia. Vietnam has greatly enhanced its reputation as a leading hub for electronics manufacturing and export in recent years. It has also been helped by a free trade agreement with the European Union (EU) that became effective from August 2020. Elsewhere, the Indonesian government is seeking to go up the value chain by utilizing its abundant natural resources. For example, it's taking advantage of its nickel resources to become a production center for electric vehicle batteries.

The evolving landscape in China and India

While China and India have arguably been the greatest beneficiaries of globalization to date, the changes outlined above will threaten some of their business models. In both economies, however, new sources of growth are already emerging.

  • India is likely to continue to benefit from its demographic trends as an unmatched source of engineers and technology graduates at scale and relatively low cost. The country is working to develop its “Made in India” strategy, which aims to increase its share of global manufacturing and technology supply chains. However, its strengths in areas, such as customer support and call center services could be subject to disruption from technologies like artificial intelligence.
  • China is clearly likely to be affected by any large-scale move towards nearshoring by western or other Asian companies. Nonetheless, it continues to play a hugely important role in the global manufacturing system. But as the Beijing government works to increase the country's self-sufficiency, new opportunities are emerging thanks to the promotion of Chinese ‘national champions’ in areas such as silicon chip production, enterprise resource planning software, and renewable energy generation.

Other potential sources of growth

The changing global picture is also creating opportunities elsewhere in the world. Singapore, for example, is looking to cement its status as Asia's financial services hub in the wake of Hong Kong's loss of political independence. Brazil, meanwhile, has ample natural resources and a thriving renewables sector. It also has the potential to benefit from friendshoring, where European or North American companies look to work with partners from nations that are more sympathetic in political terms. However, growth in Brazil could be hampered by its relatively high levels of red tape, in addition to its somewhat ambiguous foreign policy stance on issues such as the Russia-Ukraine conflict. The outlook for Taiwan is also complex. It boasts a world-leading semiconductor sector but tension over its relationship with China adds uncertainty and risk.

The pace of technological and geopolitical developments makes it difficult to predict how existing industries could be disrupted in the years ahead. This includes the investment opportunities created as companies and governments in emerging markets look to respond to – and take advantage of – the latest thematic trends. As such, it's vital that investors remain alert to these changes and ready to adjust their portfolios in response.