According to Frank Holder, rapid changes in the financial governance and environment of emerging markets, and an increase in government scrutiny, have changed the atmosphere for emerging markets.
If you’re to invest in emerging markets, Frank suggests looking for, and avoiding, the following risks:
Frank Holder believes “corruption is the most pervasive and most significant issue that corporate investments in foreign markets need to look out for.”
Frank also says this is something that can happen to any company’s employees, including new recruits and long-time talent, and that it is critical to look out for it when investing in emerging markets.
Research has shown that Frank Holder has a valid point in regards to watching out for corruption in emerging markets. According to data from the Euromoney Country Risk Q1 2013, “corruption levels are worsening across emerging markets and pose a real danger to the sustainability of economic growth.”
The report further revealed that while most investors are turning a blind eye to corruption for the sake of higher return and growth, the rising corruption levels are negatively impacting economic growth.
According to Frank, corruption in emerging markets takes place in two major forms:
- Corrupt litigation
- Democratization of corruption
Data from Legal Week has also revealed that the most common type of fraud in emerging markets comes in form of intellectual property theft, and that the mistake most companies investing in emerging markets make is that of not tailoring their due diligence to the market they are investing in.
One of the main reasons companies are susceptible to fraud is because controls and compliance mechanisms are often weak in certain foreign markets, particularly emerging markets According to Frank Holder, it has historically been very difficult to rely on traditional fraud prevention methods such as analyzing formal books, records and information systems to mitigate potential fraud.
3. Public Insecurity
Frank Holder also emphasized the importance of paying attention to public insecurity risks, and he says these risks could create a broad range of difficult business issues on a worldwide scale. Some risks that are becoming more common in emerging markets are:
- Higher crime rates
- Politically motivated violence
- Local unrest
Frank Holder also says that the infrastructure of an emerging market is another main risk of which investors should beware.
Depending on the market, infrastructure risks can be in the form of lack of power or poor transportation systems. Quality control failure, leading to faulty and dangerous products being shipped, could also be major concerns.
How to Protect Your Company from Emerging Market Risks
Frank Holder says there’s light at the end of the tunnel, though. Even though the risks for investing in foreign markets can be formidable, investors can take action to reduce these risks. Here are some tips:
Know whom you do business with; regardless of the business involved, Frank Holder suggests spending more time getting to know parties you do business with; he also emphasized the importance of considering the reputation of those involved.
Enforce risk management procedures in areas with the most risks
Create awareness about your regulations; Frank Holder also suggests training and educating employees in emerging markets, and making sure they are aware of your regulations, because actions deemed unacceptable in the United States are allowed in many emerging markets.