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Describe how EM economies have evolved from manufacturing-led growth models towards innovation-driven sectors Identify the structural growth drivers supporting EM equities Explain the potential investment opportunities and risks associated with EM equities
When ‘made in China’ becomes a compliment, and why investors should care
Describe how China has evolved into a significant global innovation and technology centre Identify the structural factors supporting China’s innovation growth Explain the investment opportunities and risks associated with Chinese equities
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“Nobody puts EM in a corner”: How emerging markets went from catching up to leading innovation
Founded in 1908 and headquartered in Edinburgh, Baillie Gifford is unique in the UK in being a large-scale investment business that has remained an independent private partnership. This ownership structure has allowed efforts to be focused entirely on clients’, and their investments. Baillie Gifford is one of the UK’s largest active investment management firms.
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Describe how emerging market companies have evolved from low-cost manufacturers into globally competitive businesses Explain why index-level performance may not fully reflect underlying company growth and innovation within emerging markets Discuss the potential long-term investment implications of a renewed period of emerging market outperformance
home to world-class companies
02:37 | EMERGING MARKETS
VIDEO
Describe how global supply chains and trade relationships are evolving through trends such as regionalisation, reshoring and geopolitical fragmentation Explain how domestic and regional demand are becoming increasingly important drivers of emerging market growth Discuss the potential investment implications of re-globalisation and supply-chain diversification for emerging market equities
Re-globalisation
02:11 | EMERGING MARKETS
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Describe how emerging market economies have become more resilient compared with previous market cycles Explain how reduced reliance on dollar funding may affect emerging market vulnerability to currency volatility Discuss the potential investment implications of improving emerging market macroeconomic conditions and sovereign credit trends
Emerging resilience
01:47 | EMERGING MARKETS
Describe the role emerging markets play in supporting global economic growth and industrial development Explain how emerging markets are contributing to structural themes such as artificial intelligence and the energy transition Discuss the potential investment implications of increasing global reliance on emerging market infrastructure, resources and technology ecosystems
Developed markets lean on emerging markets
01:44 | EMERGING MARKETS
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The discrepancy and the opportunity
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Many investors still largely associate emerging markets with volatile currencies, commodity exporters and the occasional political crisis but not with globally competitive innovation. That view no longer reflects the full picture. Some of the world’s most disruptive companies are now emerging from exactly these markets. In some sectors, emerging market businesses are no longer adapting western models. Instead, they are building new capabilities that are competing with — and in some cases outpacing — their developed market counterparts. Take Chinese electric and autonomous vehicle manufacturers like BYD and Pony.ai. These companies are successfully competing with western rivals on everything from battery technology and autonomous driving systems to pricing and manufacturing scale. In 2025, BYD overtook Tesla as the world’s biggest seller of electric vehicles, marking the first time it outpaced its American rival in annual sales.
And yet, despite all this, emerging market equities remain relatively underrepresented in global indices relative to their share of global economic growth, creating an opportunity for active investors. Emerging economies now account for around 60% of global GDP growth, according to the International Monetary Fund, yet emerging market equities still represent only around 10–11% of the MSCI All Country World Index. This dynamic is becoming increasingly visible at an industry level too. China now accounts for more than 70% of global EV battery production capacity, according to the International Energy Agency, while Taiwan produces the vast majority of the world’s most advanced semiconductors. Critical parts of the global technology supply chain are increasingly concentrated in emerging Asia — an important consideration for investors seeking exposure to industries expected to play a central role in the global economy in the decades ahead.
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The investment case for emerging market equities, however, does not come without risks. Political instability, regulatory intervention, governance concerns and currency volatility can all contribute to periods of market stress. Emerging market equities have also historically experienced sharper drawdowns than developed markets during periods of geopolitical uncertainty, rising interest rates or slowing global growth. Liquidity can also be more limited in certain markets, while corporate governance standards and shareholder protections may vary significantly between regions and companies. Historically, some of the strongest periods of emerging market outperformance have followed episodes of significant volatility and negative investor sentiment, reinforcing the importance of long-term investment horizons. For advisers, this can create both opportunities and challenges in client conversations. While emerging market equities can experience sharper periods of volatility during global shocks and sentiment-driven selloffs, they may also offer long-term growth potential and diversification benefits for investors willing to tolerate short-term volatility. All of this means that position sizing, time horizon and client risk tolerance remain important considerations for advisers. However, excluding emerging market companies from long-term portfolios would be shortsighted. Investors focused primarily on developed markets risk overlooking some of the most significant sources of future global growth and innovation.
Positioning EM in client conversations
Describe how emerging market economies have evolved from commodity- and manufacturing-led growth models towards innovation-driven sector Identify the structural growth drivers supporting emerging market equities, including demographic trends, digital adoption and financial inclusion Explain the potential investment opportunities and risks associated with emerging market equities, including volatility, governance considerations, regulatory intervention and currency risk. Assess how emerging market equity exposure may contribute to long-term portfolio diversification and client investment objectives
So, what are investors missing when it comes to emerging market companies? In many cases, they are overlooking businesses benefiting from structural growth trends and the advantages of operating without outdated legacy infrastructure. Rising middle-class populations, supportive demographics and accelerating technology adoption across parts of Asia and Latin America are creating conditions for faster innovation-driven growth than in many developed economies facing ageing populations and more mature consumer markets, a trend highlighted in research from institutions including S&P Global and the International Monetary Fund.
For long-term investors, emerging market companies provide access to structural growth themes that may unfold over decades rather than quarters, including rising middle-class consumption, digital financial inclusion, healthcare access, automation and energy transition infrastructure. These dynamics also help explain why many investors favour an active approach within emerging markets. While benchmark indices have evolved significantly, they can still contain large concentrations in state-owned enterprises, financial institutions and cyclical businesses. According to Baillie Gifford’s emerging markets investment team, identifying long-term winners in the asset class often requires investors to look beyond short-term macroeconomic noise. Instead, the focus should be on factors such as earnings growth, competitive advantages, governance standards and structural industry trends.
The absence of legacy infrastructure and the need to innovate through constraints have become competitive advantages, allowing businesses to scale innovation at remarkable speed.
In other words, emerging markets are no longer “catching up” with their western counterparts. Increasingly, they are leading the way, influencing global consumer behaviour and technological innovation.
The changing composition of emerging market equities is also telling. Historically, many investors associated the asset class primarily with state-owned banks and commodity producers. Today, information technology accounts for more than 30% of the MSCI Emerging Markets Index, while communication services account for close to 9%, according to MSCI sector data. This reflects the growing influence of technology platforms, semiconductors and digital consumer businesses across emerging economies.
Other sectors in Asia, including digital payments, have in some cases evolved faster than their developed market equivalents, helped by the fact they were built without the burden of legacy infrastructure in the first place. Companies such as Grab and Sea Limited, for example, helped pioneer mobile-first “super app” ecosystems integrating payments, ecommerce and financial services across Southeast Asia. The contrast with developed markets is striking. According to Worldpay’s Global Payments Report 2026, digital wallets represented 77% of ecommerce transaction value in Asia-Pacific in 2025, compared with closer to 40% in the US and UK, where card-based payment systems remain more deeply entrenched. In many Asian markets, the absence of widespread legacy banking infrastructure allowed mobile-first payment ecosystems to scale more rapidly. And in Latin America, digital banking and ecommerce platforms like Nubank and MercadoLibre are busy building digital-first financial ecosystems for millions of previously underbanked consumers, often leapfrogging traditional banking infrastructure in the process.
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How China built its innovation machine
For many years, “made in China” implied imitation and scale from a western perspective, but this view needs updating. In today’s reality, “made in China” increasingly means technological capability and innovation leadership. China is no longer simply replicating western ideas at a lower cost; in several sectors, Chinese companies are now competing at the frontier of innovation through proprietary research, patent creation and advanced manufacturing. For long-term investors seeking exposure to structural growth trends, moving beyond the traditional perception of China as the world’s factory floor is therefore becoming essential. One indication of this shift is China’s growing influence in global patents and pharmaceutical licensing. A decade ago, China accounted for less than a quarter of global patent filings, according to the World Intellectual Property Organization (WIPO), and played only a limited role in pharmaceutical licensing markets. By 2025, however, China accounted for almost half of global patent filings, according to WIPO data, while Chinese biotech companies were involved in deals representing close to 40% of global pharmaceutical licensing activity, based on Evaluate Pharma estimates. China’s lead over many of its global competitors has widened dramatically in recent years. According to WIPO, the country’s IP office received 1.8 million patent applications in 2024 — more than three times the number submitted to the US Patent and Trademark Office — and, among the world’s five largest IP offices, recorded faster patent filing growth than the US, Japan and South Korea since 2000.
This transformation did not happen overnight or by accident: over the past two decades, China has relied on heavy investment in research and development, a deep STEM talent pool and the advantages of a vast domestic market to accelerate its innovation progress. Rising geopolitical tensions and restrictions on access to western technology have accelerated rather than slowed China’s push towards self-sufficiency, particularly in strategically important sectors such as semiconductors and AI. Government policy has supported this direction. Beijing’s “Made in China 2025” strategy prioritised industries including semiconductors, robotics and electric vehicles, while its “dual circulation” framework strengthened the focus on domestic innovation and reducing reliance on overseas supply chains.
China’s innovation advancement is especially evident across autonomous driving, electric vehicles, biotechnology and semiconductors industry. In autonomous driving, Baillie Gifford’s emerging markets team points to Pony.ai, which is already deploying robotaxi services across major Chinese cities. Separately, Goldman Sachs Research estimates that around 500,000 robotaxis could be operating across more than 10 Chinese cities by 2030. The EV supply chain tells a similar story. According to SNE Research, CATL and BYD together accounted for more than half of global EV battery installations in 2025, highlighting China’s growing lead in one of the world’s most strategically important industries. Biotechnology has become another major area of competitive strength for China. McKinsey estimates that China now contributes around 30% of the global innovative drug pipeline, up from just 3% in 2013. Companies such as BeiGene are benefiting from faster clinical trial recruitment, lower development costs and access to large patient populations.
From robotaxis to biotech
Describe how China has evolved from a low-cost manufacturing economy into a significant global innovation and technology centre. Identify the structural factors supporting China’s innovation growth, including research investment, industrial policy and domestic market scale. Explain the investment opportunities and risks associated with Chinese equities, including geopolitical, regulatory and governance considerations. Assess how exposure to Chinese innovation-led sectors may influence long-term portfolio construction and diversification decisions for different client risk profiles.
All this carries significant implications for global competition as Chinese companies are forcing western rivals to respond to faster product cycles, lower costs and rapid advances in technology.
China’s long-term priorities are unambiguous, with ambitions to become a global science and technology leader by 2035 and a strategic focus on areas such as semiconductors, artificial intelligence, biotechnology, quantum computing and advanced manufacturing.
Not all parts of China’s market are benefiting equally from these trends, creating a wide gap between companies driving innovation and those still tied to older economic models. Broad exposure alone may therefore miss many of the businesses driving China’s innovation story. As geopolitical tensions, regulatory intervention and governance concerns remain relevant across the market, selectivity and careful risk assessment cannot be overlooked. Some businesses may benefit from long-term trends linked to AI, healthcare innovation or the energy transition, while others remain weighed down by debt pressures, weaker domestic demand or political uncertainty. This means a more active approach is needed to identify companies with durable competitive advantages, strong management teams and the ability to navigate a fast-changing environment. China’s innovation story still divides opinion among investors, and periods of volatility are unlikely to disappear. But according to Baillie Gifford’s investment teams, focusing solely on near-term macroeconomic concerns risks missing a much bigger structural shift already underway: China’s transition from low-cost manufacturing hub to one of the world’s most important centres of technological innovation.
Not all China exposure is equal
At the same time, global supply chains remain deeply interconnected despite rising geopolitical tensions. Western governments may be growing more cautious around Chinese technology and AI-related risks, yet many strategically important industries, such as electric vehicle batteries, pharmaceuticals and semiconductors, remain heavily exposed to Chinese manufacturing capacity, scientific research and critical components. For investors, this changes the conversation around China exposure, because the opportunity is no longer limited to domestic economic growth or consumer demand. It is also about understanding the growing influence Chinese companies exert across global industries, and assessing how those businesses fit within long-term portfolios alongside the geopolitical, regulatory and governance risks that still come with investing in China.
For advisers, the challenge is therefore becoming more nuanced than simply deciding whether to “allocate to China” or not.
The more important question may be which parts of China’s economy are likely to shape global industries over the coming decade and whether portfolios are positioned to capture that change in a measured and suitable way. That requires balancing long-term growth potential against very real geopolitical, regulatory and governance risks, while recognising that some of the companies driving structural change in AI, healthcare, automation and clean energy are now emerging from China itself.
