Typically, the reclassification of a country from emerging to developed market status by equity index providers (such as MSCI Barra) is a mixed blessing for the companies that are based there.
On the one hand, the recognition that the economy in which the company operates is “up there” with the United States, Western Europe, and Japan is a recognizable badge of honor and will create immediate demand from index funds.
On the other hand, if a country is judged sufficiently industrialized to join the major leagues, it means that it has been on top of the emerging market pile for a long time. As a result, almost overnight, a company based in the upgraded country will go from being a big fish in a small pond to being a small fish in a big pond. The transition can be painful, as I have recently witnessed in the case of the incumbent telephone operator in a nation receiving this honor. Instead of being benchmarked against companies that were lagging it in terms of performance and practices, the company suddenly found itself compared to companies with far better established operating and reporting procedures.
Company managements and Investor Relations teams need to prepare for this transition well ahead of time, by familiarizing themselves with the demands this new status will create, and by starting to establish contacts with their new followers. For example, on the sell-side, with the exception of a handful of truly global sectors (for example, the oil and pharmaceutical industries), it is not the same financial analyst who follows an emerging market company and its developed market competitor.
Recently, fellow ReputationPoint contributor, Peter Verrengia, and I were interviewed by Korea’s leading business newspaper – Maeil Business – in which we discussed this and other Investor Relations issues and trends facing this dynamic and successful economy. While MSCI Barra still categorizes South Korea as part of the MSCI Emerging Markets Index, it is likely on the path to be upgraded in the not-so-distant future, so that many Korean companies will need to prepare for an eventual transition to “developed” market status accordingly.