Emerging markets: Are The Opportunities Worth The Challenge?

The contribution to the world’s GDP by the emerging BRIC nations (Brazil, Russia, India and China) and the growth markets of Indonesia, Mexico, South Korea and Turkey, is expected be twice that of the G7 between 2011 and 2020, according to Goldman Sachs’ Jim O’Neill – the man who first coined the BRIC acronym a decade ago. O’Neill stands by his predictions and insists the BRIC nations have “withstood the shakings of the world's economic foundations, and emerged more robust than ever.”

But a recent slowdown in the rate of emerging nations’ currency growth against the U.S. dollar has put the brakes on more bullish forecasts as the outlook for business in these markets is being seen with growing trepidation.

Losing the glow
While the attractions of emerging markets are obvious - expanding populations, an increasing middle class and few domestic competitors - success in these markets is not guaranteed; nor is growth. Pacific Investment Management Company (PIMCO) forecasters estimate emerging economies will increase between 4.5 percent and 5 percent in real terms in 2012, the slowest growth in a decade, except for 2009. This could shrink more as developed economies particularly Europe and the United States refocus their efforts at home.

This contagion from weak developed market growth, exacerbated by delayed or insufficient support from local policy makers, is the greatest threat to emerging economies, warns Iftikhar Ali Syed, group finance director for Dubai’s Bin Zayed Group (BZG), a family-owned multinational based in the frontier-market of the UAE. Created as a real estate and construction company in 1988, BZG has diversified and expanded and now holds interests in more than a dozen countries across the globe including frontier and emerging economies across Eastern Europe, Asia and Latin America.

Despite the challenges, Ali insists opportunities still exist for companies to make a significant amount of money in these regions if they enter the market with the right mindset, understanding the risks and having done their homework.

"The most important thing when looking to operate in another country is that people should not try to take short cuts," Ali told Knowledge. "Due diligence is most important. Understanding supply and demand and the economies’ rules, regulations and taxation systems and their way of conducting business is vital. There are too many operators in these regions that would take advantage because you come from a different area. Before making a business decision to move into a new market, it’s important to understand the country’s political and legal systems and transparency of transactions.”

“Then it’s important to consider what kinds of products, goods and services could be added at competitive prices within the existing distribution system, so you enter the niche market through sheer competitive aspects.”

A tough business environment
Most risks can only be evaluated and monitored once the cultural shock of entering a new market - with its different business practices and varying levels of bureaucratic interference - has been understood. This in itself is not easy. The BRIC countries have been doing business with companies from developed nations for more than 20 years but still rate well down in the World Bank's 2010 Ease of Doing Business Index with Brazil coming in 120, Russia 124, India 139 and China 87 out of 183 countries.

The biggest challenges to doing business, says Ali, occur in countries where economic interests are in the hands of people with political control.

"This is the only wild card, the only challenge that can’t be foreseen and it can destroy or build groups overnight. Take the potential for somewhere like Malaysia. It's a great country and they’ve made wonderful progress during the last 40 years in terms of education, business development and managing their market - they came out on top of the Asian crisis in 1997-98 - but what drives Malaysia down in terms of economic deterioration is the uncompetitive pricing structures that’s reducing their production and affecting their economy."

Then there are problems like in Russia where business houses can be taken to court for reasons that come to light after two decades. Or in China where Rio Tinto executives were recently jailed for offering bribes - a practice many international operators insists is standard in the country.

“The uncertainty of actions at sovereign level impacts all emerging markets but things are changing slowly,” he says. "Many nations have learned their lesson, and they know the wealth creation which comes from attracting new business is good for everyone.”

Hands-on research
As well as understanding the mechanics of doing business in new markets, it’s important to understand the market itself. Management research companies and the internet have a role to play in terms of commenting on economic structures, levels of progress and the vision of the state, but at the end of the day it’s an appreciation of the niche market you want to be in that can make the difference between failure and success.

"At the Bin Zayed Group we have a theory: if we wish to enter into a new business then some of our shareholders, including our chairman, will travel to that particular country and see the business inside out. [At BZG] we have to have interconnectivity, we need to understand that business and we need to see how we need to learn it. It’s a matter of great personal interaction and hands-on management."

Helping the host
Personal interaction extends to helping the community in which the company operates. If companies want to survive and flourish in a strong emerging nation they have to be prepared to contribute to the growth of that nation, Ali says. “Assisting your workers and contributing to the welfare of the people that live in the markets where you are operating is very important because that is the surest guarantee for economic growth.”

But no matter how much investment is made it is important to keep a level head and a clear mind. “You should never fall in love with your investment,” he says. “You should know when to exit them, and that is perhaps the most important lesson in emerging markets."

[This article is republished courtesy of INSEAD Knowledge
http://knowledge.insead.edu, the portal to the latest business insights and views of The Business School of the World. Copyright INSEAD 2023]