The history of Latin America is marked by conflict between the disciples of laissez-faire policies and the champions of socialist and protectionist market alternatives. Recently, however, policy disputes that had previously been confined to individual states have gone supranational. The 2013 creation of the Pacific Alliance by Colombia, Mexico, Chile, and Peru stands to threaten the longstanding eminence of the Southern Common Market (Mercosur). While the constituents of Mercosur (Brazil, Argentina, Paraguay, Uruguay, and Venezuela) have largely rejected classical liberal institutionalist economic theories in favor of protectionism, the Pacific Alliance is ideologically grounded on free market principles, and thus poses a dual threat to Mercosur. The future of trade in Latin America hinges on the developments of and rivalries between these two trade blocs. Due to recent market developments such as the plunge in oil prices and China’s economic slowdown, the United States government can play a powerful role in steering Latin America towards liberalization and openness to foreign capital.

Mercosur, formally founded by Argentina, Brazil, Paraguay, and Uruguay in 1991, originated from a series of modest economic integration and regional trade liberalization initiatives between Argentina and Brazil that were implemented in the mid-80’s. Since its establishment, Mercosur has carried out a program largely based on economic development from or increased involvement with the United States or nonaligned economies. Fueled by a populist anti-American narrative, Mercosur has, in its twenty-five years, adopted increasingly protectionist policies toward its nonaligned trading partners. The implementation of the common external tariff (CET) — an effective tax on all goods imported from non-member or even associate member states—is one such example laid out in the organization’s founding charter.The CET rate currently hovers at 10 to 12 percent but, in the wake of the 2009 global financial crisis, Argentina and Brazil both pushed, unsuccessfully, to have the tariff raised to 35 percent. The CET rate is subject to fluctuation based on the internal politics of Mercosur constituents, which further disincentivizes foreign investors. With the Venezuela’s inclusion to the bloc in 2012, it is very likely that the CET will remain an important mainstay in Mercosur trade policy.

But while Mercosur has been a center for regionalist policy since the Treaty of Asunción in 1991, the founder states of the Pacific Alliance—Mexico, Peru, Chile, and Colombia—have long histories of free market alternative policymaking. These countries, referred to as the “Pacific Pumas” due to their economic similarities to the Four Asian Tigers of the 90’s, have held a globalist and laissez-faire orientation to capital structures in stark contrast to many of their Latin American neighbors. In the past, Alliance states have been quite receptive to American investment and to bilateral free trade agreements among each other. Since the founding of the Pacific Alliance, constituent states have eliminated trade tariffs on 92 percent of goods and services traded between member states.

In addition to jettisoning interstate trade barriers, Alliance members are also endeavoring to integrate their national stock exchanges into the Mercado Integrado Latinoamericano (MILA)—a supranational stock exchange founded in 2009 that has already allowed regional companies easier access to capital. With the recent incorporation of BOLSA—Mexico’s national stock exchange—into its system, MILA now boasts a 1.25 trillion dollar market cap (just larger than Brazil’s own BM&F Bovespa—a 1.22 trillion exchange). This aggregation of financial platforms gives foreign capital as well as member-state investors easier access to investment opportunities and likewise allows regional businesses the ability to harness greater overall market liquidity.

One additional point that sets the nascent Pacific Alliance ahead of Mercosur is the former’s adherence to and respect for institutions of which it is comprised. Mercosur has recently experienced a turbulent period in 2012 that resulted in Paraguay’s suspension from the bloc and the Venezuela’s inclusion. Paraguayan officials still contest that the grounds for the nation’s temporary expulsion from the bloc was unjustified and that there should be another vote on Venezuela’s ascension to full membership. This recent intra-bloc strife reveals the inherently hierarchical nature of Mercosur. Brazil and, to a lesser extent, Argentina, sporting GDPs of 2.246 trillion and 609.9 billion respectively, generally feel free to overshadow and in some cases strong arm smaller Mercosur constituents such as Uruguay (55.71 billion collective GDP). This de facto power divide will have to be addressed by the trade bloc if it is to successfully incorporate Venezuela into the fold and command a sustainable influence on the Latin world. At present, no such fundamental structural changes seem in sight.

While neighboring nations have, with the exception of Bolivia and Venezuela, been reticent to participate in Mercosur, states throughout the Latin world have taken notice of the Pacific Alliance and, in many cases, are eager to jump on the free-market bandwagon. Costa Rica and Panama are on their way to becoming the fifth and sixth members of the Alliance, with Guatemala following close behind. Even states historically disinclined to participate in trade liberalization have been forced to reevaluate their isolationist stances to global markets. Ecuador, sandwiched between Colombia and Peru, also shows signs of breaking with its far left history in favor of the open market. If integration and free market policies continue to bring rapid economic growth to neighboring countries, Ecuador may have no choice but to seek similar integration with its neighbors.

Though the creation of the Pacific Alliance presents new investment opportunities for individual firms, three global market trends—the collapse of crude oil prices, the rise in purchasing power of the dollar and a transition in China to a consumer-based economy — have changed the rules of the game in Latin America.

Though Latin America has enjoyed exponentially increasing demand in China for raw materials over the last twenty years, resource exporters are likely to see this trend ebb as Xi Xinping and the Communist Party look to reorient China’s economy towards service sectors. This is not to say Chinese foreign direct investment will cease to be a factor in the region’s overall trade prospects; for example, the 40-to-50 billion dollar Nicaragua Canal, which is currently under construction, is set to become the most striking example of Chinese investment. However, China’s shift away from infrastructural and manufacturing development will mean that South America, which produces 44 percent of all copper imported by China, will need to look elsewhere to export the its raw goods.

Some of the hardest hit by this change will be members of the Pacific Alliance, which are seeking to counteract this trend by trying to create a more attractive gateway, specifically for Asian investors. Peru and Chile, whose exports consist of 27 and 35 percent raw materials (excluding oil) respectively, will be hardest hit by the decrease in Chinese demand. Though the Pacific Alliance still has its eye on lucrative free trade deals with China, it may be in America’s best interest to present itself as a viable trade partner now. If the United States’ federal government were to sizably invest in much needed domestic infrastructure development, it could import raw materials from these resource-rich nations and open the door for future pan-hemispheric cooperation. This economical-oriented foreign policy could yield closer economic and political ties with Alliance members already more predisposed towards pro-Americanism than their Bolivarian neighbors.

Another reason to open up favorable deals with the alliance stems from the increased buying power of the American dollar vis-à-vis Latin American currencies. The current exchange rate is favorable for importers, and even by simply engaging with the Pacific Alliance more thoroughly through multilateral trade deals with all alliance members simultaneously rather than relying on bilateral agreements. Nations can accredit the organization with more diplomatic clout, increasing its membership and scope in Latin America. If the United States dealt directly with the Alliance, it would be a signal to the wider Latin American community that their northern neighbor respects the political sovereignty and economic self-determination of the entire region. This move would go a long way in healing the wounds in North-South diplomatic relations that have been festering since the latter half of the Cold War.

The collapse of crude oil prices is a final key economic factor in the region. Venezuela, already struggling politically in the wake of Hugo Chavez’s death, now faces further economic troubles. Petrocaribe is collapsing, and developing nations and net importers — namely the majority of the Pacific Alliance — stand to make huge temporary gains from this fall. This will shift the regional balance of power away from the petrol states — especially Venezuela — and position both the Alliance and the United States to fill the economic and political vacuum left in the wake of now hollow agreements such as Petrocaribe.

The United States has had many opportunities to craft South America to its will, and it has done so at times through heavy-handed and ultimately self-defeating means. The infamous Operation Condor initiative left much of Latin America wary of United States involvement, while the United States’ current transnational war on drugs and broken immigration policies have led to regional destabilization. The rise of a homegrown free-market liberal institutionalist movement is a positive factor for foreign investors, but it’s also an opportunity the United States cannot afford to miss. This is a chance to get things right, to develop budding economies via mutually beneficial multilateral trade agreements, to reap the benefits brought by a now favorable global macro-environment and to establish permanent ties with its southern neighbors that can someday transcend markets. It is said that by the time Washington realizes it needs Latin America economically and geo-strategically, it will already have lost it. The United States needs to prove the saying wrong.

Most of us know that tomatoes come from vines, but few are actually aware of the story fro behind the juicy red fruit that we often find at our dinner table. In fact, most people can only trace their tomato’s heritage as far back as the supermarket. Therefore, this spring, wanting to learn more about the story behind the famous fruit and the process it takes to bring it from the vine onto my plate, I took a trip to Immokalee, Florida, as part of Tucker Foundation’s Alternative Spring Break Program.

Immokalee is a small migrant town in Florida, about 30 miles inland from wealthy beach resorts such as Naples and Fort Meyers. According to the New York Times, it is a town of “taco joints and backyard chicken coops where many farmworkers still live in rotting shacks or dilapidated, rat infested trailers.” The rent to live in a single trailer exceeds their income, so most live as multiple families under one very small roof in packed and deplorable conditions. Although in recent years, “affordable” housing communities have been built in the Ommokalee area, the majority of these homes cost between $80,000 and $100,000, a hefty price tag that new migrant families cannot afford. Immokalee stands in stark contrast to the wealthy beach resorts only 30 miles away, and it is not a huge stretch to say that it almost resembles a town in a developing country.

Although Immokalee is generally reasonably safe, it nonetheless gets it share of crime and violence. In 2008, a case of modern day slavery was discovered in the center of the town where a group of undocumented migrants were imprisoned in a trailer house and forced to work against their will in fields for no pay. For many years, lack of labor inspection made migrant workers in this community extremely vulnerable to unethical working conditions. Indeed, until recently, migrant workers were forced to catch a bus to work at 4 a.m. but would only receive compensation for hours logged after 8 a.m. During the hot and humid summers, workers, not permitted to take breaks, suffered hardship under the grueling conditions. Verbal abuse, including racist remarks and discriminatory behavior, was widespread as the unregulated farms at which they worked were largely free of any government oversight.

The Coalition of Immokalee Workers, focused on advocating for better conditions for migrant farm workers, has been educating local farm workers about their rights and protections under the Fair Food Code of Conduct. Their efforts led to the creation of the Fair Food Program, a unique worker-led, market enforced social responsibility program which aims to address issues of unfair wages and sexual assault in the fields. Sexual assault, violence, and unfair wages, is not unique to Immokalee and has plagued farm worker communities around the world. Indeed it is estimated that 50 to 80 percent of all female farmworkers have been sexually harassed while working in the fields according to the Huffington Post.

The Fair Food Program involves over a dozen major food retailers, including Wal-Mart and Whole Foods, who have signed on and committed to only buying tomatoes from trusted and verified producers that provide safe and fair working conditions. Additionally, the retailers that have agreed to participate in the Fair Food Program have pledges to pay one more cent per pound of tomatoes with the money going directly to supplementing the tomato pickers wages. The companies have also pledged to drop any suppliers that violate the standards of the program.

In the past 10 years, the program has had considerable success. By having as many large retailers sign on as possible, tomato producers are left with no choice but to abide by the new regulations. Consumer and retailer pressure has made the program incredibly effective and migrant workers have directly benefited from the program. There has been a significant reduction in the amount of reported sexual harassment cases in the fields. Thanks to the additional penny per pound, the tomato pickers are paid an additional $60 to $80 a week, amounting to an additional $4 million a year received by tomato pickers according to the New York Times.

Although the Fair Food Program is not perfect, it sets a precedent for future change. The Fair Food Program currently applies only to tomato producers and there are many large retailers that have yet to sign on whose presence would greatly solidify the program. However, Industries worldwide can learn a lot from the Fair Food Program. Hailed but the New York Times as “one of the great human rights success stories of our day,”  it has demonstrated the substantial impact consumers and retailers can have on improving the well being of workers around the world.

While marching in Lakeland, FL against Publix, a major food retailer in Florida, I was amazed to see the spirit and will of the community where the national movement was initially born. Marching for three miles, they chanted, “Up, up with the fair food nation; down down with the exploitation,” unified in their strong commitment to fight for what they know is right.

When the spark of revolt first ignited with the fruit vendor in Tunisia, investors already understood the impact the conflict would have on their investments. They started transferring their money to more secure locations, often to banks in neighboring countries. Lebanon banks acquired a total of almost $11 billion dollars from Syrian banks, according to a report from the UN Economic and Social Commission for Western Africa. When the conflict reached Syria, and refugees flowed into Lebanon, they added another billion dollars to Lebanon’s economy through consumer spending. Thus, in the initial stages, the Arab Springs had a generally positive impact on the Lebanese economy.

The large increase of Lebanon’s population has added pressure to their economy. Refugees, realizing that they cannot return to Syria quite yet, are now competing with Lebanese citizens for jobs. Before the refugees tried to enter the work force, Lebanon was already having issues with job creation. The Ministry of Economy in Lebanon explains how “The Lebanese economy already has a problem meeting local demand for jobs. Out of the 25,000 we need to create each year, we are only creating 3,000.” With such a low demand for workers, but an increased amount of available labor, many Lebanese citizens complain about wage cuts. Because of the increased competition for jobs, The World Bank describes how Syrian refugees have offered to work for half the wage that Lebanese citizens traditionally received for unskilled labor, overall dropping wage rates in Lebanon.

There is also competition for public goods and services, with the government taking the brunt of the costs. Because the Syrian refugees haven’t been absorbed into the Lebanese job market, they require government assistance. Unfortunately, with this increase of an unemployed population, the government has to somehow fund services for them with a dwindling budget. The Associated Press cited a World Bank report that estimates for the years 2012-2013, “$1.5 billion in government revenues will be lost while simultaneously, government spending will have to increase by $1.1 billion because of the surge in demand for public services,” which entails a “total negative impact on the Lebanese budget to $2.6 billion.” Because of the increase in demand for these public services, it has caused a decrease in overall accessibility and quality of the services, as the services were not acclimatized to the sudden surge in population or use.

Geographically, Lebanon is largely bordered by Syria on the East, Israel in the south and the Mediterranean Sea for its west. As a result, Lebanon’s gateways to land routes for trade to the Middle East are mainly through Syria and Israel. The Syrian conflict has disrupted these land routes, which has impacted their flow of goods and ability to transport their goods for trade. The Wall Street Journal explains “In the years that followed, Syria remained a main land route for some of Lebanon’s biggest economic drivers– commerce, tourism, and foreign remittances.” The effects on Lebanon’s trade deficit have been large, “according to estimates from data covering 2008 to 2013, Lebanon has a trade deficit of between 30 percent to 40 percent of GDP” (ESCWA). 

Due to this close proximity, the economies of Syria and Lebanon have been intertwined. Before Syria decided to diversify and liberalize their economy, Lebanon was portrayed as “a lung of the Syrian economy” and Syria was a major market for Lebanese products, as described by the Wall Street Journal quoting Abdallah al-Dardari, ESCWA’s chief economist and Syria’s former deputy prime minister for economic affairs. Their GDPs have indicated this relationship, where in the past two years, Syria has lost between 35% and 40% of its GDP in the past two years, while there was a 6% decline in GDP growth in Lebanon over the same period (ESCWA).

Countries can easily prepare for natural disasters or economic impacts from direct involvement from war. It is not as easy, however, to predict the economic impact of war in a neighboring country, especially one, which has both fiscal and social, ties to the affected country. The most that Lebanon can do now is hope for increased international aid in order to support their newly enlarged population. A Reuters article describes how recently, Lebanon was able to sell “$1.1 billion of long-dated bonds [in April].” This demonstrates the investors are still willing to invest in the country and have hope for its economic resurgence. Hopefully, there could still be positive implications of the rise in population. There would be increased demand for goods and services, such as housing or food and an increased workforce to help meet the demands. This could lead to an increase in prices, but the Reuters article quotes Alix-Garcia, “an assistant professor at the University of Wisconsin,” whom “says that could be offset by free food aid supplied to the refugees.” While there are currently short-term economic pressures for Lebanon, for the long run, they have new potentials for the direction of their economy. Most modern day economies are no longer traditionally bound to a specified output or method of production. With these changing circumstances, the largely trade-based Lebanese economy can adapt and use this new producer and consumer force to promote their economy in an area of conflict.

 

 

With the world’s second largest economy after the United States, China has definite potential to exert strong influence on the global economy. However, largely due to the government’s reluctance to laissez faire, it hasn’t yet fully capitalized on its clout, especially in the global financial sector. But all that may soon change, as China’s central bank chief said in early April that China may loosen overseas investment regulations for private investors.

Historically, China first voluntarily opened up to foreign trade and investment under Deng Xiaoping in 1978 with his new capitalist-inclined system that promoted market forces. Since then, China’s financial sector has undergone significant reforms but it still exhibits the legacy of a centrally- planned economy in which the government, to this day, plays an instrumental role in credit allocations and pricing of capital. In addition, the government instituted a myriad of regulations that control both foreign investment into China and Chinese investment in foreign investments. Hindered by a maze of administrative procedures, foreign investors in China have complained that the Chinese government does not allow them to compete fairly with native businesses. Chinese investors that want to invest overseas, too, are heavily limited by esoteric guidelines.

However, beginning in October of 2011, the Chinese government took a significant step toward freeing up its hold of the financial sector. The deregulations include allowing foreign companies with RBM deposits outside of China to use their offshore account to directly invest in China, and allowing direct investment overseas for private Chinese investors in Wenzhou, also known as a “general financial reform zone” experiment. The government, afraid of the volatile international financial sector, decided to allow Wenzhou–a city in China recognized as the “birthplace of China’s private economy” due to its role as leader in developing a commodity economy, household industries, and specialized markets in the early days of economic reforms–to experiment with direct investment overseas. Concerns over inflation and property risks have held back the Chinese government from allowing a larger-scale deregulation, but nonetheless the Wenzhou experiment is widely acknowledged by the international community as a significant step forward.

Besides de jure governmental regulations, there are many de facto barriers to Chinese involvement in foreign trade. The most prohibiting factor to foreign trade is not what the laws say, but rather the existence of confusing, and often conflicting, laws at all levels of government. A unitary state with 23 provinces, 5 special autonomous regions, 4 self-governing municipalities, 2 special administrative regions, and a hierarchy of departments at all levels, China has innumerable bodies with legislative and enforcement powers that can influence foreign firms’ operations. Many foreign, and even native, companies have vocalized the impossibility of navigating the Chinese bureaucracy. A common phrase in Chinese business circles is, “It’s okay since no firm is 100% in compliance with regulations.” This trend poses significant legal risk for potential foreign investors.

Another substantial barrier to investment in Chinese markets is the inability of foreign private equity firms to freely convert RBM into other currencies. In terms of entry into Chinese market, foreign entrants must obtain special permission from the Ministry of Commerce to make investment in China using foreign currency-denominated funding pools. The Ministry of Commerce, then, picks certain transactions that it considers beneficial for the country and its policies. Later, the lack of RMB convertibility means that it’s difficult for a company to get its profits out of China. Again, companies require Ministry of Commerce permission, and are subject to different regulations depending on which individual in the Ministry handled the case, and his or her interpretation of the laws. Currently, successful foreign companies in China exploit the murky financial environment by taking advantage of unpredictable legal enforcement and shady accounting through local knowledge and networks.

However gloomy and risky foreign investors view the opportunities in China, one thing is for certain: they all want a slice of the large economic pie. “The more open China is to the world, the more benefits China will get and the more competitive local industry will be,” said Li Xiaogang, director of the Foreign Investment Research Center at the Shanghai Academy of Social Sciences. Following a similar philosophy, the Chinese government has begun responding to international pressure and removing itself as the referee in the financial markets. Ironically, Chinese deregulation may eventually level out the playing field in China’s financial sector, and with foreign companies as players, all the participants may reap benefits.

There is no denying the growing interconnectedness between the Chinese and American financial markets. Like other global financial centers, upswings and downswings in either the Shanghai Stock Exchange or the New York Stock Exchange have often been preceded by similar trends in the other. The surplus of recent global financial headlines and heightened index volatility appears to have strengthened this relationship. A simple investment simulation suggests that the Shanghai Stock Exchange can be moderately useful as an intraday trading strategy for the Dow Jones Index during the current periods of volatility.

Although this correlation has not always been present, the Chinese and American markets have gradually shifted toward each other. From 1993 to 2001, the Dow Jones Index China had only a 0.0332 correlation coefficient with the Dow Jones Industrial Average, suggesting no observable correlation. But a loosened economic policy has led to more intertwined financial markets between the U.S. and China. From 2000-2009, the correlation coefficient between the Shanghai Stock Exchange and the Dow Jones had risen to 0.731, indicating a strong  relationship.

The trading strategy I’ve tested is quite simple: use a moderate rise or drop (0.85% or more) in the Shanghai Stock Exchange (SSE) to invest in the same direction in the Dow Jones when the New York Stock Exchange opens, six and a half hours after the SSE closes. For example, if the SSE opens at $100 and closes at $100.86, then I would buy shares long on the Dow since the SSE gained greater than 0.85%. If the SSE closed at $99.14, I would short the Dow.

After running this model from 04/20/09 through 10/14/11, excluding the holidays of both exchanges from the model, the total return was 83.81%, with annualized returns of 27.57%. The hit rate for positive gains, in which a 0.85% increase in the SSE led to any positive gain for the Dow, was 64%, while the hit rate for negative gains was 54.55%. Total return from positive gains was 44.62% and total return from negative gains was 39.19%.

With a modest hit rate but a significant return, this trading strategy seems to capitalize on the volatility of both exchanges. Essentially, when the Dow goes in the same direction as the SSE, it’s able to rise or drop high enough to offset the losses incurred when it goes in the opposite direction as the SSE. Moreover, it seems that those losses incurred are also quite minimal. As a result, although this trading strategy does not have a very great predictability factor for total positive or total negative gains, it does suggest a sort of dual volatility.

This should come as no surprise. The rise of a deeply intertwined and globalized financial market has inevitably strengthened the relationship of the Chinese and American financial systems. At the same time, financial crises with implications for the world economy have increased volatility and shaken investor confidence. Although this is not a long-term trading strategy, it may have strong returns in the near future by taking advantage of the US-China correlation and world market volatility.

Over the past half-century, fast food giants such as McDonald’s and Yum! Brands Inc. have succeeded in entrenching themselves in American culture and establishing strategic positions within the American market. However, the economic downturn in the United States over the past couple of years, coupled with steep commodity and energy prices, the housing crisis, and increased unemployment, have collectively diminished consumer spending and increased production costs. These factors stunted the growth of the fast food industry and stifled corporate profits. The ensuing stagnation has since been compounded by recent health-related initiatives promoting healthier eating, which draw consumers away from fast food and towards healthier alternatives. In turn, the entire situation prompted fast food chains like McDonald’s and Yum! Brands to change their approach. Fast food chains have refocused their attention on international expansion, particularly in the emerging markets.The term “emerging markets” encompasses rapidly industrializing nations like China, India, and Russia. These economies feature explosive growth and an expanding middle class with greater disposable income. In addition, these nations contain significant urban populations and largely unsaturated markets. Jointly, they present rather promising growth prospects for fast food chains. Eager to take advantage of such favorable economic conditions, companies like McDonald’s and Yum! Brands have consistently remained at the forefront of establishing hundreds of new stores in these locations.

Although McDonald’s, which boasts over 32,000 locations in 117 countries, may be the world’s largest hamburger fast food restaurant chain, it is struggling to keep up with its competitor, Yum! Brands Inc. The rapidly expanding and innovating corporation, which owns KFC, Taco Bell, and Pizza Hut, has created a tremendous presence overseas, arguably more so than McDonald’s. It operates an impressive 38,000 restaurants in 110 countries, earning the title of the world’s largest restaurant company.

The two juggernauts together have sparked an industry-wide search for new markets, which has in turn fostered intense competition among opposing chains. This phenomenon is nowhere more evident than in China. With a middle class of over 300 million people and estimates that the figure could reach 500 million within a decade, China is potentially a very lucrative market.

Even though Yum! Brands has already established itself as the prominent fast food company in China, it is constantly seeking to expand its reach. In order to increase brand recognition of KFC in China, Yum! Brands has been opening the equivalent of a new KFC location almost every day. Of its 1,400 new restaurants in 2009, Yum! Brands opened 509 in China alone. In an effort to keep pace with Yum! Brands, McDonald’s has been forced to constantly innovate and expand.

McDonald’s expects to increase spending in China by 40% in 2011, as well as remodel 80% of its existing locations by 2013 as part of its $1 billion global investment project. This comes in response to Yum! Brands’ current domination of the Chinese sphere with 4,000 outlets in the country and 40% of the market share. As of now, McDonald’s clearly lags behind, possessing only 16% of the market share and having just 1,900 restaurants in China.

In addition to trying to outpace the local competition, fast food companies like Yum! Brands have begun to buy out these smaller companies. In April of this year, the company made a preliminary offer to acquire a larger share of the Chinese company Little Sheep Group Ltd., a casual-dining chain that specializes in “hot pot” dishes.

It is important to note, however, that the transition to a more global outlook is not solely limited to the two biggest players in the industry, nor is the growth limited just to China. Other chain restaurants, including Starbucks, California Pizza Kitchen, and Domino’s, all have plans to enter and expand their number of stores in China as well. Fast food chains have also sought out various markets in Eastern Europe, especially Russia. In fact, McDonald’s recently announced its plans to increase its store count in Russia by 15%, which amounts to building 40 new restaurants. This would be in addition to its $174 million investment and 30 new restaurants constructed in 2010.

Despite the massive penetration into these developing economies already, the most significant growth has yet to come. In an attempt to gain larger footholds in regions like India, the two fast food mammoths have made ambitious long-term investments that will likely materialize within the next few years. Most notably, Yum! Brands has plans to quadruple the number of its restaurants in India by 2015, which would bring its number of locations in India to a grand total of 1,000. Already a major contributor to the company’s revenues, Yum! Brands expects that Indian operations will bring in $100 million in net income in that same year. What’s more, the fast food company hopes to derive as much as 60% of its earnings from emerging markets by 2015, which would constitute double what these very same markets earned Yum! Brands just five years ago. To accomplish this, Yum! Brands expects to invest over $120 million to fund this additional expansion, on top of the $100 million invested in 2009. In an effort to keep up, McDonald’s expects to open 30 new restaurants in India in 2011 alone as part of its $1 billion global investment project that is currently underway.

With over 245 million people and a large urban youth population, Indonesia is rapidly becoming an attractive market as well. Yum! Brands recently opened its 400th KFC  in Indonesia, just 32 years since the first one opened there in 1979. And the company shows no indications of stopping at 400. According to the Managing Director of the Asia Franchise Business Unit of Yum! Restaurants International, Yum! Brands plans to have over 1,000 KFC and Pizza Hut restaurants in Indonesia by the year 2015.

However, gaining entry into new markets can be difficult, and requires more than merely constructing the physical plant. Rather, it entails tailoring the operations to the specific region, and more specifically, adapting to the needs of the new clientele. In order to stimulate demand for their products, fast food chains have developed unique food options to cater to the differing tastes endemic to that particular nation. Although such menu alterations may be costly, they are integral parts of capturing market share from local restaurants. For example, McDonald’s removed its iconic hamburger from its menus in India because there, the cow is considered a sacred entity. Instead of beef, McDonald’s offers an extensive vegetarian menu, which features 100% vegetarian patties consisting of potatoes, peas, carrots, and Indian spices. McDonald’s has also launched new additions to its McSpicy line, in hopes of attracting a larger number of customers. Beyond India, the company offers shrimp burgers in Japan, a rice and bean dish in Costa Rica, Big Macs wrapped in pitas in Greece, and burgers with rice patties rather than buns in China.

In the case of China, the fast food giants didn’t stop with simply diversifying their menu options.They have also altered operations in order to adapt to the new environment. McDonald’s has employed a strategy to broaden its reach, increase accessibility, and ultimately bolster ales. To do so, the fast food chain plans on renovating existing locations, increasing the number of drive- through outlets in big cities, and expanding the number of restaurants that feature delivery services, 24-hour service, and McCafés. Yum! Brands has similar ideas to stay competitive, hoping to offer breakfast, home delivery, and 24-hour service in its KFC and Pizza Hut chains. Moreover, Yum! Brands has hired Chinese managers to run its operations in China to gain insight into how the Chinese market works. The fast food company has also taken steps to enhance its perception as a more upscale dining experience by offering menu options like wine and escargot at its Pizza Hut locations in China.

While investments in developing economies have the potential to be incredibly profitable, emerging markets like China also pose potential problems for fast food chains. Such high growth environments often bring high levels of inflation, which translates into higher commodity prices, rent, and labor costs. Despite the elevated costs, the move to emerging markets appears to already be paying dividends. Yum! Brands’ recently released a quarterly report indicating a 13% increase in same- store sales, coupled with a 15% rise in transactions in its Chinese restaurants. Furthermore, 54% of its total profits came from China. McDonald’s appears to be trailing a bit, but still posted a 3.2% increase in sales in the Asia Pacific, Middle East, and Africa region. Evidently, with so much room for expansion in these developing markets, the possibilities seem limitless.