Emerging markets can be the winning lottery ticket or a death sentence for your business. They can offer the potential of long-term growth and financial stability with access to the right information. "Nearly 80% of global economic growth comes from emerging markets and developing economies."
(Fund, 2018). Develop within the emerging markets as a gold mine for investments, steer your business steadily through the market and watch it prosper around you. It seems so easy, so why doesn`t everyone do it? In short, the overriding risk factors of investing in an emerging market may bring copious setbacks for your company. Without understanding the risks and taking the correct precautions, investing in emerging markets may be catastrophic. Global organisations can navigate their way through this untapped potential, inevitably leading to grand opportunities to develop, but with the certainty of risk. The ultimate solution: risk management. Through investigative due diligence
, you can stay ahead of the instabilities and volatile landscapes that are presented within many emerging markets.
Acknowledging and understanding the impending risks that you will face before 'getting into bed' with an emerging market is of top priority. The principal risks are (but are by no means limited to) Political, Economic, Socio-Cultural, Environmental, Legal and Technological.
- Political Risks: Emerging markets are, traditionally, breeding grounds for a volatile political landscape. Political instability, superseded by civil wars, corruption and general internal issues, is prevalent in the Middle East and North Africa (MENA) region. Political upheaval can, therefore, lead to an unstable business environment. Thus, these aforementioned conditions provide a serious worry for global organisations investing in emerging markets.
- Socio-Cultural Risks: Simply understanding the local culture is not sufficient when investing in emerging markets. Bribery and corruption can be rife in developing countries which can lead to great difficulty when conducting business. The Transparency International`s Corruption Perceptions Index (2017) reveals that some countries within the MENA region are perceived to be the most corrupt in the world.
- Environmental Risks: Emerging markets may be situated in areas where natural disasters are routine. Tsunamis, earthquakes, volcanic eruptions and, in general, extreme weather, could cause havoc on your investment, disrupting supply chains and inevitably causing financial loss. Furthermore, extreme weather may take a toll on equipment, necessitating routine checks and maintenance. Not only is this time-consuming, but it can also drastically impact your costs.
- Legal Risks: Cronyism is also common in emerging markets, causing an increase to risks of corruption and bribery. Additionally, developing countries could be subject to mass money laundering (due to weaker regulations) and terrorist activities (such as terrorist financing*). Understanding, complying and risk-management of the legal system in emerging markets may be a key factor in deciding whether you should invest or not. On top of economic and trade sanctions that may already be imposed, certain laws may enforce limits on the amount of currency that you can take out of a country. Moreover, there may also be restrictions on who can invest and who can sell. There is also a chief concern of 'expropriation risk', which is the possibility that the host government could seize foreign-owned assets. Risks of such magnitude must be effectively dealt with and preferably avoided. Legalities stem from economic to environmental, any of which could inflict monumental risks to your business. Commonly, emerging markets are rapidly industrialising, leading to the problem of unstable laws and regulations, which are still evolving. Economic laws are not the sole problematic source, others such as environmental, e-commerce and data laws, which are ever-changing in emerging markets, may result in major risks.
- Technological Risks: Last but not least, technological concerns deliver risks that may be unavoidable. There may be a lack of infrastructure in emerging markets, onset by the recent rapid growth and industrialisation. In effect, this may cause financial burdens on logistics and supply chains. Furthermore, there may be overriding impacts on access to a consistent source of power and the supply of those who can maintain and repair such technologies.
Due Diligence - Expect the Unexpected