The opportunities speak for themselves, but the close interplay between business and politics in emerging markets means the risks for investors can be hard to pin down. Many countries have weak governance, unstable regimes or opaque decision-making processes that bring complex challenges to doing business. These call for foresight, adequate planning and robust management systems to ensure the potential benefits outweigh associated risks.
Judicial systems and law enforcement are often weak and lack independence from the executive and even political factions. This can create opportunities for politically-motivated investigations, contract renegotiation and creeping expropriations that are difficult to predict - trials of prominent businesspeople in the former Soviet Union and seizures of Western companies’ oil rigs in Venezuela are some such recent examples.
While much attention is focused on the so-called BRICs – Brazil, Russia, India and China – other emerging and even frontier markets are increasingly drawing in investors, often with the lure of mineral and natural resource wealth. These countries present a different set of challenges to operations than their larger cousins, with politics often a ‘winner-takes-all’ affair raising the stakes for those involved.
The recent crisis and ensuing conflict in Cote d’Ivoire highlighted the risks to international supply chains that arise when political contestation takes a violent turn: tons of the soft commodity remained packed in the warehouses of Abidjan whilst cocoa buyers were left in a state of limbo between an export ban imposed by the besieged presidential contender Alessane Ouattara, and tax collection by officials backing the incumbent Laurent Gbagbo.
The physical security of assets and safety of personnel on the ground are immediate concerns to any business operating in a hostile environment. Offshore oilfields, ships on the isolated high seas and operations in remote or conflict-prone locations can all be threatened by direct or incidental violence.
One risk common across all emerging markets is that arising from corruption. An evolving legislative environment has raised the standards for legal compliance but operational issues remain when bribes or small payments are routinely demanded for even the most innocuous transactions.
There are a number of measures which organisations can implement to both reduce the chances of their being exposed to such threats and to mitigate their potential impact, but the best strategy is to spend time up front to plan.
Top tips for investors entering emerging markets
- Eyes wide open: important decisions should be well-informed decisions, and the canny investors are those that examine the full range of risks prior to committing their resources, be they people, money or reputation.
- Plan, plan and plan: the old adage still stands that prevention is always better than cure; no treatment option, be it for a damaged reputation or destroyed facility, can compensate for a well-planned investment strategy upfront.
- Do your diligence: knowing your business partners is a concern for all investors, but is all the more crucial in a context where business and politics are often linked in obscure ways.
- Cover your assets: uncertain environments call for certain measures – the security of your assets needs to be assured through a robust and flexible security management system tailored to the local operational environment.
- Expect the unexpected: the pace of change today is faster than ever before, and events can spring from seemingly nowhere. Monitoring trends and challenging your thinking is key to staying ahead of the curve.
Richard Fenning is CEO of Control Risks, a global risk consultancy specialising in political, security and reputation risk.