The Hidden Risks in Emerging Markets

The Hidden Risks in Emerging Markets

1. Elections and other political events, economic crises and changing social attitudes can alter the best-established plans in emerging and advanced economies.

2. Issues such as executive compensation taxation, the proper scope of financial regulation, and international mergers and acquisitions have come to the fore in the wake of the crisis, and marked international differences in opinion and policy on these issues are already evident.

   • The broader internal economic concerns
     • For example, protectionist sentiment in response to the realignment of economic power in favor of emerging nations like China and India will inevitably also affect the debate
   • Host countries have learned, according to George Chifor of the University of Windsor in Canada,
     • "That more value can be extracted from foreign companies through the more subtle instrument of regulatory control rather than direct seizures."
   • The risk that a government will discriminatory change, or fail to enforce, the laws, regulations or contracts that govern an investment in a way that reduces an investor's financial returns is what we call
     • "policy risk".

3. The main concern was the "risk of expropriation", the possibility of host governments seizing foreign-owned assets

   • Today, this risk has largely disappeared

4. IT IS DIFFICULT TO COVER THE RISK OF POLITICS

   • International business companies often use some combination of legal contracts, insurance, and financial instrument trading to protect the income streams of their investments against currency or price fluctuations.
     • However, these approaches offer little protection against political risk.

5. THE NEW RISK MANAGEMENT PLAYBOOK

   • Given the difficulty of building policy risk hedges through contracts, insurance, or financial risk management tools, foreign investors must accept responsibility for directly managing risk themselves.

6. INVEST IN GOODWILL

   • In the deefficiencyveloped world, managers spend a great deal of time and energy improving
   • When companies move to less developed markets, they often expect enormous instantaneous efficiency gains by exploiting the technologies, business models, and practices they have managed to refine in their national markets.

7. Framing the debate

   • When companies enter new countries, they often participate in extensive public relations campaigns that amount to little more than ads for the brand and specific commercial companies
     • Instead of engaging in public relations campaigns that amount to little more than ads for the brand, companies must master the art of political spin.

8. Touching the correct data flow

   • Traditionally, managers who have conducted policy analysis in a host country have directly consulted with employees, local business partners and supply chain partners.
   • The information gathering process varies in intensity and structure, from inspecting radio and newspaper stories to conversing with locals and using computerized contact management systems.

9. Find political pressure points.

   • The network of relationships in a society greatly influences policy outcomes, especially in countries with weak legal systems. To take advantage of these networks, international investors must identify and compromise the power bases of local politicians.
     • Once again Eni has shown the way, this time in Kazakhstan. Through its subsidiary Agip KCO, Eni has adopted a business model that responds to the economic and social needs of the former Soviet republic. The company favors Kazakhs over non-Kazakh providers, and conducts knowledge transfer, training and development seminars for them.

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