For B+H Architects, deciding where to deploy the bulk of its capital spending during the past few years has been a slam dunk.

The Toronto-based multinational architecture and design firm has put its money where the work is. The company has set up offices in Ho Chi Minh City, New Delhi, Singapore and moved into a larger workspace in Shanghai to accommodate the 120 employees it now has in China's business capital.

"There is a building boom going on there that is literally unprecedented in the history of the world," Bill Nankivell, B+H's chief executive officer, said in an interview.

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"If you look at the amount of urban growth, the growth of cities and the demand for buildings on a fairly large scale - housing, workspace, learning, shopping and entertainment - there is nothing comparable going on in Canada, certainly even less so in the United States and not so much in Europe either. So for what we do, this is the place you need to be," he said.

For B+H, expanding into emerging markets has been a wise move. In China alone, the firm has completed 87 projects that total more than 84 million square feet of built space as the country's economy continues to enjoy blistering growth. At the same time, the company has expanded significantly in Canada, but the economic opportunities here as well as in the United States and Europe pale in comparison to those in China, India, Vietnam and Southeast Asia.

The International Monetary Fund predicts emerging-market economies will expand at an average rate of 6.5 per cent this year and in 2012 while the growth rate in more advanced economies will average 2.5 per cent. For most North American firms, expanding into Asia and focusing on fast-growing emerging markets has made perfect business sense.

However, the savvy strategy that is being deployed by hundreds of multinational corporations is creating unintended consequences for the global economy.

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A capital flow stoking

A surge of investment, which includes so-called hot money from foreign investors seeking greater returns in emerging markets, is adding to inflation pressures that have become the biggest threat to Asia's economic growth. The wave of capital headed east is also exacerbating global imbalances with Europe and the United States where economic growth remains tepid and unemployment continues to be stubbornly high.

This two-speed economic growth divergence between emerging and developed economies is expected to widen over the next decade, creating separate yet equally daunting challenges for the countries on both sides of the equation.

For the fast-growing countries of Asia such as China, India, South Korea and Vietnam, battling inflation has now become the most significant test for central banks. Soaring prices for commodities such as oil, fertilizer and copper - driven in part by strong demand from Asia - are boosting costs for manufacturers and food producers while workers are demanding and often winning hefty wage increases. The concern is the prospect of a re-emergence in Europe and North America of the dreaded phenomenon known as stagflation (rising inflation and low economic growth) as these cost increases eventually get passed on to consumers.

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Indeed, fast-food giants McDonald's Corp. and Starbucks Corp. have already announced price hikes in response to increasing costs.

The cost of basic food staples, such as onions in India, garlic in China and cabbage in South Korea, has climbed so rapidly that governments have had to levy price controls. Central banks have also begun aggressively raising interest rates in response to what South Korea's President Lee Myung-bak calls a "war against inflation."

Stock markets in China, India and much of Asia are skidding on worries that inflation and tightening measures will crimp corporate profits and bring an end to the region's rapid economic expansion. India raised interest rates by another 0.25 percentage points this week to combat double-digit food inflation and soaring commodity prices. Other Asian countries including Taiwan, South Korea and Singapore have seen their currencies appreciate sharply.

Another major issue is the fact that China's overheated property market remains on fire, despite a raft of dramatic policy moves aimed at cooling buyer interest. Just this week, China raised the minimum down payment for a second home to 60 per cent from 50 per cent. A trial property tax is also being implemented in Shanghai and Chongqing ahead of a planned nationwide rollout in five years.

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China's consumer price inflation is expected to climb to 5 per cent in January, and rising prices for everything from real estate to electronics are causing many people to withdraw cash from banks to fund purchases before prices climb even higher. This rise in demand for cash combined with the property market measures, two interest rate increases and four hikes to Chinese banks reserve ratio requirements since October have dramatically tightened the overall liquidity in China's banking system, according to Na Liu, founder of CNC Asset Management and an adviser on China strategy to Scotia Capital.

"In fact, there is literally a liquidity crunch," Mr. Liu said in a report to clients this week. One-month interbank lending rates in China have reached a record level, forcing China's central back to inject liquidity into the system through reverse bond agreements and a suspension of central bank bill sales.

"Although the tightening measures have exerted heavy pressure on China's financial markets, they do not appear to have had any impact on China's property markets," Mr. Liu said.

Real estate bubbling

Chinese property transaction volumes have been stable and prices have not pulled back. In China's 10 largest cities, overall unit sales are up 15 per cent in January from a year ago. The prospect of a crash in the overheated Chinese real estate market is now weighing heavily on global capital markets.

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In Hong Kong, meanwhile, an influx of foreign bankers and executives moving to the city to tap the region's economic opportunities is boosting the already expensive rents of luxury properties defined as being at least 100 square metres in size. Luxury property rents rose 13 per cent in 2010. Property brokers Savills PLC and Jones Lang LaSalle Inc. are forecasting a 15 per cent increase this year, according to Bloomberg News.

Despite policy initiatives by central banks to limit foreign capital inflows, it's unlikely that the influx of investment in emerging economies in Asia will end any time soon. A survey conducted by PricewaterhouseCoopers found that 39 per cent of CEOs considered China as the most important country for future growth. That compares to just 21 per cent who cited the U.S. as most important.

Among CEOs based in North America, 94 per cent expected their companies' revenues in Asia to increase this year, but only 67 per cent are predicting growth in North American revenue. Just 48 per cent of European CEOs expect revenue growth in the EU compared to 92 per cent who expect revenue growth from their operations in Asia.

Toronto-based big-screen movie theatre builder Imax Corp. has doubled its business in China in the past year, while its North American operations are growing at about 15 per cent.

"China has been the fastest-growing area of the world for us and I think it is going to continue on that pace for the foreseeable future," Rich Gelfond, Imax's CEO, said in a telephone interview from Davos, Switzerland, where the challenges of the two-speed recovery have dominated discussion at the World Economic Forum.

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"Part of what is going on in China is the rising income levels. The disposable income is really creating a huge appetite for entertainment … it's hard to believe, but on a per-screen basis, our [revenue]numbers are higher in China than they are in North America," he said.

These business opportunities are sure to inflame the challenges of the two-speed recovery. As they focus on fast-growing and possibly overheating emerging markets, Western businesses will likely continue to invest less in their home countries, intensifying the divide and the risks to the global economy.