Strategies for Managing Risk and Maximizing ROI in Emerging Markets
For new businesses that are aiming to make their mark, or established businesses that want to take the next step forward, setting up shop in an emerging market could be the ticket to success.
An emerging market is defined as an economy in a developing nation that offers the opportunity for business. The growth of businesses in these areas creates investment opportunities and markets in which to do business and find new customers. The global economy has helped create these markets, and our connected and mobile way of life allows companies the world over to do business together. It also allows businesses to establish relationships with customers all over the globe.
The Benefits of Doing Business in an Emerging Market
Getting Ahead of the Competition. One of main draws that bring businesses to emerging markets is the opportunity to establish an early foothold in a new area. By building a name early on, a company can achieve a first-mover advantage and become recognized as the standard in its industry. This is particularly appealing when a company sells a product or offers a service that faces a lot of competition in a more established nation. Being first can help build relationships and provide an advantage when competitors enter the market. It also can help you get a leg up in attracting foreign direct investment, which is when a company’s controlling interest is held by a company in a foreign country.
Capital. The availability of new capital is a big incentive for businesses that enter emerging markets. As markets develop, investors are seeking to put their money into businesses, and a new market means less competition. For businesses that have used up their existing capital, investing in an emerging market can mean a new stream of funding. Meanwhile, small businesses have the opportunity to woo investors who can help them take the next step.
Cost Savings. New businesses are part of what makes an emerging market. Businesses often find conditions that are ripe for growth in these countries. Often there is less bureaucratic red tape in an emerging market, which makes it easy to set up shop. Tax rates and regulations also are often favorable. In addition, emerging markets normally have populations that are growing, and that have money to spend. Those consumers are looking for goods and services they haven’t had access to previously.
Diversification. Doing business in just one area can limit growth and makes companies vulnerable when an economy goes in a slump. By doing business in several countries, companies are able to survive rough economic times in one particular market. If profits go down in one market, you can make up those losses in markets that are healthy.
The Risks of Emerging Markets
Political and Safety Risks. Peter James, Global Organizations Producer at Clements Worldwide, notes that potential risks of doing business in an emerging market include political instability and potential catastrophic losses from riots, civil unrest and terrorism. This not only is bad for business, but also opens up employees to risks.
“Duty of care is vital as companies need to safeguard their employees from additional exposures,” James says. “Organizations have a responsibility to keep their employees safe and protect them from risks overseas that they may not face in their home country.”
He adds that many developing countries have poor or no banking infrastructures and must use cash to pay vendors and payroll, which can lead to crime because large sums of money are kept on premise.
Companies also need to consider unexpected costs in regard to hiring and firing, labor laws, and area unions. Things to look into include laws regarding time off, insurance and what sort of notice needs to be given in the event of an employee’s termination.
Adjusting to Different Way of Doing Business. When a company enters a new market, it has to attract new customers, and that means doing business with people with a different background. If a company is looking to open a location in China, for example, it’s wise to learn about what consumers want, and how business is conducted. This can be especially challenging for smaller companies, which have less staff and fewer resources.
Corruption. The lack of regulation that can make conducting business easy also can have a downside. Emerging markets can have fewer legal and ethical regulations, and less sophisticated, corrupted legal systems. Doing business in these countries can lead to interactions with criminals, and corrupted law enforcement. Beware of suspect business practices, and even threats and violence.
Infrastructure. Infrastructure in developing countries often isn’t state-of-the-art. This can affect travel, via airports that don’t have as many flights as airports in more developed countries; unreliable trains; and poor highways and traffic that can make getting to work difficult.
Tools for Determining the Riskiness of Emerging Markets
Obviously, companies are taking a risk whenever they do business in an emerging market. Smart companies will research certain metrics to calculate the risks of doing business in a specific country. Some things to look into include a country’s GDP; GDP per capita; GDP growth; and key industries. The World Bank provides many helpful tools and key indicators for each country including a GDP annual growth map.
Other factors you’ll want to consider is the ease of doing business in a country. Find out what types of regulations regarding business a country has, hiring and firing laws, and unions. Corruption is another issue. Doing business in an emerging market might mean encountering corrupt politicians and police forces. One tool to use is Transparency International’s Corruption Perception Index.
How to Protect Your Business and Employees Overseas
Entering a new market is like exploring a new frontier—you don’t fully know what you’ll discover. That’s why getting the proper insurance is vital before doing business in an emerging market.
“Make sure all policies are global and don’t have country restrictions,” James says. “Businesses should have foreign liability insurance which protects them from lawsuits outside the U.S. I recommend that businesses also get overseas coverage for medical, evacuation, kidnap and ransom, life insurance, accidental death and dismemberment, disability, and DBA Workers Comp.”
Companies doing business in an emerging market should consider protecting their employees with the following types of coverage:
Medical and Evacuation and Repatriation Insurance provides transport coverage to the nearest capable medical facility in case a local medical center is not able to provide adequate treatment.
Extortion, Kidnap, and Ransom Insurance provides financial indemnification and expert crisis management in the event of a kidnapping for ransom, wrongful detention and/or extortion.
Clements’ International Defense Base Act Insurance Coverage is a form of insurance provided to employers to protect against injury incurred or disease contracted by an employee arising during employment.
Clements’ Group Life Insurance protects employees’ beneficiaries against future financial burdens should an untimely loss occur, anywhere in the world.
High-Limit Temporary and Permanent Disability Insurance is a high-limit disability insurance for professionals to cover the loss of income in the event of disablement.
Group Personal Accident Insurance provides comprehensive coverage for accidents occurring on overseas assignments to individuals and organizations.
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