The term "emerging market" was first coined circa 1981 by Antoine van Agtmael, then an executive at the International Finance Corporation (IFC) responsible for mobilizing investment funds for the stock markets of developing countries, as a more palatable term than "Third World stock market" which he had first used in promoting international portfolio investment to those markets.
Originally defined on a fairly strict GNP per capita basis the World Bank used to identify developing countries, over the decades since the term "emerging market" has come to be used in one or both of two ways to categorize a market:
Historically, the business case for investing in emerging markets runs along these general lines:
Therefore, given the ubiquitous use of the term "emerging market" in investment references, it is important to have an idea of what the user may be mean by the term, and when thinking of investing, to ask specifically how individual countries qualify as emerging markets under the logic. Not all of the points given above apply to all asset classes in all countries at all times!
While most major providers of international financial benchmarks (such as MSCI Inc., S&P Dow Jones Indexes, FTSE, and J.P. Morgan) all have families of indexes and data services for the emerging market category, established around broadly similar guidelines after extensive use of public consultation, there can still be significant differences in country coverage and in "graduation/demotion" policies.
Examples of differences involving graduation include most notably FTSE's graduation of S. Korea from emerging status to developed market status in 2009, while S. Korea continues to be considered an emerging market by MSCI (as of Feb. 2012).
And, yes, some "developed markets" - e.g., Greece and Iceland - have back-slided!.
These differences make it important for a benchmark user to "know their benchmarks", if one has strong opinions on where assets are to be allocated, or wants to avoid possible "double exposure". On the latter point, for instance, an investor using a FTSE-based Developed-World Index Fund for developed country stocks exposures and an MSCI Emerging Markets Index Fund for its emerging markets exposure would have Korean stocks in both funds, more Korea exposure than it may prefer!
"Frontier Markets" is a term first used publicly by IFC in Sept. 1996 to indicate emerging stock markets that were/are so small and underdeveloped as to be off the radar for all but the most adventurous international portfolio investors. In some instances, frontier markets may not be open to foreign portfolio investment at all.
However, the term has gained some traction in the investment and indexes industries, and people/investors interested in the category should exercise the same diligence about having terms clearly defined.
The J.P. Morgan Emerging Bond Index (EMBI)
Understanding Emerging Market Indices - Differences among Indices Drive Emerging Market Exposures for Investors in Surprising Ways
Sept. 2014, Calamos Investments LLP