Growth and Risk Management in Emerging Markets - Essay Example

GROWTH AND RISK MANAGEMENT IN EMERGING MARKETS and the Growth and risk management in emerging markets Globalization has increased tremendously over the years, and it has been established that globalization is not diminishing any time. For that reason, businesses and markets should be ready to embrace change. Globalization refers to growth of investment and trade accompanied by the growth the integration of economies and in international business around the world. The concept of globalization is based on relatively simple premises that include technological developments that have increased the speed and the ease of international communication and travel. Communication and travel have increased making the world smaller as people are more aware of the events that are happening outside their home country. When people are aware of the things happening in the outside country, they have a better understanding of the foreign opportunities in those countries. Therefore, when people have a better understanding of opportunities in foreign countries they tend to increase investment and international trade, as well as, business operating across national borders. Increases in foreign investment and international trade means that the economies around the world become more integrated; hence, growing the risk in business dealings. This essay will examine global strategic management, growth, and risk management in emerging markets. Strategic management encompasses the implementation and formulation of initiatives and major goals taken by the company’s top management on behalf of the stakeholders. Strategic management is based on the consideration of resources and the assessment of the external and internal organization in which the organization competes (Kose & Prasad, 2010, pg. 56). The management has the function of ensuring that it deals with risks management in the organization, especially in emerging markets. Emerging markets can be defined as a group of low-to-middle-income countries that are pursuing substantial economic and political reform, as well as, a more complete integration into the international economy. Although there have be no clear definition of emerging markets they are associated with the following characteristics as follows scale and dynamic of change, low-to-middle-income on World Bank revenue per head benchmark, current liberalization of the political system and a move towards superior involvement in the political process. Lastly, the emerging markets have a moderately recent economic liberalization. Denationalization of previously state owned-agencies and lessening in the state’s role in the economic, as well as, elimination of foreign exchange controls and hindrances to foreign investment. The global marketplace has rewarded the organizations the value of entrepreneurial risk-taking where most companies have chosen to invest heavily in developing and promoting individual growth. Additionally, companies have adopted policies that are environmentally friendly to help in coping with the competitive business world (Olsson, 2002, pg. 90). Therefore, in order to achieve their goals in competitiveness, the organizations have taken risk in the international world to ensure that their achieve growth. The main goal of emerging markets is growth, and where there is growth, there is a risk associated with the business opportunities that are taken up by any organization. Emerging markets focus on market competitive risk, workforce currency, pricing and tax risk, ignoring the political, supply chain and operation risk. The management should consider various factors before deciding whether risk should be managed and plan resources for risk management. The management should establish how risk occurs in order to establish how to manage it whether it is local or international. Secondly, the management should establish how pervasive the risk is to the entire organization. There are various examples of shared risk in the world in emerging markets, and they include currency, supply chain, tax, pricing, market risk, fraud, and corruption. Emerging markets are desired for their cost-saving potential and are at a critical destination in the new growth frontier. Organizations in developed countries are increasingly tapping into buying power of billions of people or consumers in the growing economies. About 2.89 billion people in Russia, India, Russia, Turkey and China make up more than 40% of the world’s population hence accounting for 13% that is the United States $6 trillion of the world GDP. With increased emerging markets, many risks are associated with investing in any market. However, the pace of expansion in the high-growth economies has resulted in high complex and rapidly changing and diverse risk management. Although there have been many challenges in the emerging markets, there has been a tremendous opportunity for the organizations that have approached the markets with defined risk strategy. Risk management in any organization, which is planning on growth, is integral as it occurs in their day-to-day activities. In that, the more the business grows, the more the risk an organization faces; hence, requiring more evolved management risk strategies. Emerging markets have been identified as one of the major global risks because they are likely to dominate the economy. Therefore, for developed markets to succeed in these markets, they have to become strategically imperative. Many investors have asked the question of what are the opportunities or risks associated in the trade-off in emerging markets. The answer the question is broad because emerging markets are occurring in developing countries meaning that the growth opportunities are high. The developing countries are a heterogeneous group and the trend at which the countries are growing economically, and politically does not seem to be diminishing time soon anytime. Growth in developed countries has become slow due to competitiveness an increased interest has gone to the emerging markets. The growth in the emerging markets compared to those in-developed markets have shown great differentials in the transformation of the structure of the global economy. They have not been shaped by the cynical phenomenon that have been occasioned by the current financial and economic crisis. To understand the emerging markets, it is relevant for the organization to understand the misconceptions that have been associated with the challenges and rewards of doing business in the emerging markets. For example, the risks in the emerging markets are either grossly overstated or highly understated same as the growth opportunities associated with the markets. A good example that has been used to illustrate this misconception is China where many executives in the organizations believe that they can manage and can do business in China. However, the investment environment in China is far more complex and nuanced that what most investors can appreciate. This is because on- the- ground investment risks in the country have been understated. Another good example that can help in understanding the misconceptions is Africa where most managers lack the right information on the markets, as well as, their market conditions. In that, they do not understand that most people or the greater population in the Sub-Saharan live in countries where the GDP growth is adjacent to inflation. Additionally, the investors do not know that there is the mushrooming African middle class making many people believe that there are no any realistic investment opportunities in Africa, which is not the case. Investors believe that African markets have excessive risks; however, although there are appreciable risks in investing in Africa it is overstated. According to the United Nation Conference on Trade and Development, it was established that Africa bids the highest risk-adjusted yields on foreign investors amongst all other emerging markets. It can be seen that only advanced or developed countries executive officers who are thinking of investing in emerging markets. However, even the powerhouse multinationals out if China, India Brazil and South Africa among other countries are competing amongst themselves to enter into the emerging markets despite the risks. Powerhouse multinationals are becoming bona fide competitors for the marketplace share in industrialized markets. The investment buys developed countries or by countries competing across geographies have various implications when it comes to operations and strategy. For example, the multinationals are confronting new risks and growth as they aim to compete with their long-time rivals from developing countries and the excellent emerging markets (Singh, 2010, pg. 90). For example, China has become a threat to the United States as they have chosen to invest in Africa; China being a long time rivalry of the United States has led them to rub shoulders while competing in different markets. For example, most of athlete footwear’s industry is headquartered in the North but their output or production is in the south and most specifically China. Most of the products from china are exported to Brazil leading to friction between the countries where they opted to in place duty on the exported goods. Brazilian believe that products are dumped in their markets at a very low cost. By imposing duty on the exported goods, the government has reduced the trade wars between the two countries. The emerging markets cut the sales revenues leaving the companies with little resources for remedies in the short run. The multinational companies have mitigated the risks of exploiting in emerging markets by ensuring that they understand know their customers, partners and the government that they are dealing with in the markets, as well as, other stakeholders. Additionally, the companies have opted to carry out due diligence by employing different kinds of techniques and lenses, especially by using verifiable and independent sources. Carrying out due diligence is not an easy task for the organization because by definition the institutions of the organization are bourgeoning, and their information framework are less developed. Organizations rely on self-proclaimed experts in the local economies forgetting to verify the information that they need to ensure that their organization runs properly; hence, maximizing the opportunities and mitigating risks (Geman, 2008, Pg. 56). Therefore, the ability of performing in world-class due diligence comes from doing it repeatedly through challenging parts of the world to ensure that there they have the capacity to recognize similar problems that may crop up. The information to be used by the organization should be collected, gathered and interpreted by people who are independent to the business and are mutually trustworthy by all sides. When organizations have due diligence, they can applied by foreign investors top effectively maximize opportunities and mitigate risks. One approach that can be used is to establish business-to-business alliance approach where two businesses can agree on how to gain high-returns in places where there is high-risk. For example, a multinational electric power organization must establish business to business agreement with an oil company in Vietnam because there are a high risk and high-return market. If the business does well, the two companies could reproduce the relationship elsewhere in the region. Business-to-government agreements are another approach that organizations can use to ensure that there is due diligence. By so doing, there will be a win-win solution as they expand and legitimize objectives if the government as they help in economic growth and creating jobs. In a survey conducted by Ernest & Young (2007, Pg.14) on risk management in emerging markets. Interviews were conducted for more than 900 interviews with senior finance and business executives in different countries around the world. The purpose of the research was to gain a deeper understanding of the way the company’s risks in the emerging markets. The research established that more than a third that is 38% of the developed markets have been operating in the emerging markets for the last 10 years. However, most of them have not been surveyed in the emerging markets. In that, the history of operations has not been translated into a robust process to enable them in identifying risk. The survey further found that 56% of the respondents did not have a clear framework for looking at the full range of emerging market risks. Organizations have recognized the controls around expansion into the new global markets as an imperative improvement opportunity. When risk management is properly executed, it allows the organization to reap great rewards from the investments placed in the emerging markets. Therefore, organizations should conduct formal risk assessment when considering whether to become involved in the emerging markets. Additionally, they should have a will-documented process that covers the dealings of the management of risk in the emerging markets. Understanding the specific risk in a very market allows the organization to mitigate the effects of the risks and make decisions relating to new opportunities faster, as well as, greater confidence. Organizations have learned various lessons in relation to risk management in emerging markets. One such example is the survey conducted by Ernest & Young (2007, pg. 67). They found that most of the executives indicated that the most relevant lesson they learned was that it is significant for organizations to understand better the local market of the organization. So that they can work closely with the local partners and experts to learn about the local, market and understand the local culture. Secondly, the organization should be ready to get rid of the misconceptions that are associated with emerging markets where they believe that managing risk in new, and emerging markets is the same as managing risk in their home countries or on other emerging markets (Wang & He, 2014, pg. 78). Therefore, organizations need to understand the local’s laws, cultures, regulation and ethics. This is because markets have rapidly changing risk profiles; consequently, making it essential that through risk management is conducted not only prior to entering the market, but also periodically for the point forward to make sure that the changes are recorded and addressed. The emerging markets are dynamic; hence, greater endangered risks. The risk profile of each emerging market is unique where they are some overreaching financial, compliance risk themes that cut across industry sectors, operational and geographies. Recognizing the potential risk, as well as, investigating it van help in affecting the plans of the organization in the sense that they will have a better understanding of the leading practices that they need to address in the markets they want to venture. Bribery, fraud and corruption have become a significant issue in the emerging market from the participants due to competition (Glick, Moreno & Spiegel, 2001, pg. 34). For that reason, The United States has played an integral role in ensuring that risk is minimized by creating policies and regulations that work across all borders. For example, there is the Foreign Corrupt Practices Act, that prohibits quid pro quo payment to foreign government officials in the by the United States citizens and global companies operating in the United States. The FCPA furthers requires that proper maintenance of accurate records, books and adequate systems of accounting records. Many countries have adopted similar laws to ensure that there is transparency in emerging markets, and to prevent bribery and corruption that has become rampant in emerging markets. According to Transparency International, the global civil society has dedicated to fighting corruption, and there has been an increase of investigations in the recent years to curb corruption. Other issues that have been identified to be a major problem in the emerging markets include asset misappropriation, conflicts of interest, vendor collusion and fraudulent financial reporting. The survey concluded that the appropriate ways of assessing and controlling risk exposure are implementing the standards through communication, training and education. Organizations should also conduct risk fraud assessment specific to the circumstance of the operation of the business (Huang, 2007, pg. 24). Additionally, the organization should establish the appropriate standards of conduct that are globally accepted through procedures and policies. The organization should also investigate, escalate, remediate and provide disciplinary protocols to punish those people who put the organization at risk. Globalization has also increased the risk factors in the global market in that; the emergence of the information technology has also increased the fraud in the emerging markets. However, information technology matters can be dealt with in emerging markets by defining the standards for locally managed information technology, access of information, and working with the local partners to establish how best to comply with the local standards. The organizations should also evaluate the adequacy, and efficiency of information technology expenditure plans in order to strengthen controls and to improve IT capital program execution. By so doing, the organization will be at a safer place as they will have minimized and mitigated risk. Learning or establishing the risk culture in emerging countries helps in properly aligning the organizational structure and risk management. It also helps in improving communication and create a strong foundation for better risk management in the market as the organization before setting base in the country will have established the culture, ethics, and policies of the country; hence, making their work easier. In conclusion, growth and risk in emerging markets go hand in hand and for that, reason the management of the organization should devise ways in which they learn about the risk associated with emerging markets. The old saying that goes Think Globally, act locally” has not been used or is less applicable in the emerging markets as most developed economies are going to find greener pastures in the emerging markets before they even establish whether those markets can manage to handle their business. Therefore, it is imperative for organization to have a clear understanding and do research on the emerging markets before they decide to indulge in them. References Ernst & Young. (2007). Risk Management in Emerging Markets. Geman, H. (2008). Risk management in commodity markets from shipping to agriculturals and energy. Chichester, England, Wiley. http://www.books24x7.com/marc.asp?bookid=29483. Glick, R., Moreno, R., & Spiegel, M. (2001). Financial crises in emerging markets. Cambridge, Cambridge University Press. Huang, W.-X. (2007). Institutional banking for emerging markets principles and practice. Chichester, England, Wiley. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=190708. Kose, M. A., & Prasad, E. (2010). Emerging Markets Resilience and Growth Amid Global Turmoil. Washington, Brookings Institution Press. http://public.eblib.com/choice/publicfullrecord.aspx?p=601459. Olsson, C. (2002). Risk management in emerging markets: how to survive and prosper. Harlow [u.a.], Financial Times Prentice Hall. Singh, S. (2010). Handbook of business practices and growth in emerging markets. Hackensack, NJ, World Scientific. http://site.ebrary.com/id/10422549. Wang, C., & He, J. (2014). Brand management in emerging markets: theories and practice. Read More