Emerging markets’ share of investment banking revenue has increased in both percentage share and in total value over the past few years.

Of course, if you want to buy into this dynamic growth business you need to invest in emerging markets investment banks. Martin has picked three that are worth a look…

In 2005, investment-banking revenue from emerging markets accounted for almost $40 billion, or 16% of the global investment-banking revenue total. Those figures increased to just over $78 billion, a 21% share of the total in 2007.

Emerging markets’ share of investment banking revenue will soar to 28%-30% by 2010, according to McKinsey Quarterly. And depending on how quickly the global financial markets recover, emerging markets will see investment banking revenue growth from $40 billion to somewhere between $90 billion and $115 billion in the five-year period of 2005-2010.

McKinsey’s overall thesis – that emerging markets are coming to represent an increasingly important source of investment banking revenues – appears correct. Emerging market economies are generally growing economically much faster than the West, so opportunities for companies are greater and an increasing proportion of the merger business is happening there.

With high Asian savings rates, current account surpluses, and the piling up of petrodollars, emerging markets represent much of the world’s savings pool. So, it’s not surprising that emerging market investment banking business is growing rapidly, both in absolute terms and as a percentage of the global total.

So we should all rush out and buy Goldman Sachs Group Inc. (GS), right?

Not so fast.

First, Goldman Sachs has had huge successes in a number of emerging markets, notably China, but its main business remains with U.S. and European Union companies, and that’s not going to change. Even if its emerging markets business were to expand, it could never be big enough to provide more than a modest uplift over the gloomy prospects for investment banking business domestically.

Second, Goldman Sachs and the rest of Wall Street are hopelessly uncompetitive in terms of costs and fees. They can be undercut, and fairly easily.

Wall Street firms have a habit of relying on superb connections to get the mandates and a dedicated team of top quality salesmen to sell the paper. But with emerging markets being largely separate from the United States and EU, the big Wall Street houses don’t necessarily have the local connections they need. And paper issued by emerging markets often sells to investors such as the sovereign wealth funds, which are again outside the normal Wall Street speed-dial.

Moreover, Wall Street bankers are hopelessly overpaid – recent graduates from the top business schools can start at around $200,000 a year. That makes a lot of emerging market deals off-limits, because they are too small to cover U.S. investment bank’s costs.

A merger deal that might make a $250,000 fee just isn’t worth their while – by the time they’ve put analysts onto it, found a buyer and done the legal work, they’re out of pocket. A $250,000 fee is small change to a U.S. or Western Europe investment bank, but in many emerging markets it represents a decent piece of business. What’s more, there are a far greater number of $250,000 deals around in those emerging markets then there are $2.5 million pieces of business.

Local traders and analysts, even with some years of experience, make a fraction of $200,000 Wall Street salaries. That means, for most business in emerging markets, local houses are likely to be much more competitive than their Wall Street brethren.