North Korea Inside Out: The Case for Economic Engagement
Competition Between MNCs from the North and the South
1. view
Strategy and growth
Issue 15 reprint
Navigating the risks
and opportunities in
emerging markets
2. By Harry Broadman
Harry Broadman is Chief Economist and Leader of
PwC’s Emerging Markets practice.
and investment flows continuing between
Navigating the risks and opportunities developed and developing economies, but
there is tremendous growth in commerce
in emerging markets among emerging markets (South-South).
South-South trade now accounts for a sizable
20 percent of all global trade, and one-third
of foreign direct investment outward flows
originating from the South go to the South.
Implications for strategy and
operations
What does this transformation mean
for business strategy and operations of
One question increasingly on the mind of a where the on-the-ground investment risks advanced country multinationals? They’re
lot of corporate senior executives today is: generally are understated. At the other confronting a host of new risks and oppor-
What are the risk/opportunity tradeoffs of extreme, consider Africa. Most corporate tunities as they aim to compete not only
investing in emerging markets? Of course, managers whom I talk to in developed with their longtime rivals from developed
emerging markets—a term that typically countries lack accurate information about countries but also with world-class emerging
refers to all developing countries—are not market conditions on the African continent. market firms. Consider the athletic footwear
a monolith. They are a very heterogeneous They don’t know that about one-half of the industry. Most of the major athletic foot-
group. But the fact is that, as a whole, the population in sub-Saharan Africa lives in wear firms are headquartered in the North
rate of growth in emerging markets for the countries where GDP growth, adjusted for but produce a majority of their output in
past decade and a half has been twice that of inflation, has averaged more than 5 percent the South, especially in China. And, as it
advanced countries, and this trend is unlikely per year over the last two decades, or they happens, a sizable portion of Chinese pro-
to abate anytime soon. This is why there is don’t know that there is a burgeoning duction in this sector is exported to Brazil.
increasing interest in emerging markets by African middle class (and I’m not refer- The result is that Brazilian athletic footwear
companies in advanced economies, where ring to South Africa alone, by any means). manufacturers feel they cannot effectively
growth has been much slower. Importantly, Indeed, a large number believe there simply compete against the Chinese—so much so
these growth differentials reflect a secular aren’t any realistic investment opportuni- that Brazil believes these products are being
transformation in the structure of the global ties in Africa. At the same time, people see dumped at an artificially low cost into the
economy, not a cyclical phenomenon occa- African markets as fraught with excessive Brazilian market. Consequently, Brazil’s
sioned by the current economic/financial risk. There are, of course, appreciable government placed a duty on imported
crisis. This is a critical distinction that too few risks of investing in Africa—just as there Chinese athletic footwear. This ensuing
corporate executives appreciate. are substantial risks of investing in Latin trade war among the governments of two
America, Asia, the Middle East, the former large emerging markets has sideswiped the
Understanding the challenges Soviet Union, and so on. But the perceived world’s major branded athletic footwear
and rewards risks in Africa are grossly overstated. In companies, cutting their sales revenues and
There are, however, significant mispercep- fact, according to recent data from the leaving these companies with little recourse
tions about the challenges and rewards United Nations Conference on Trade and for remedies in the short run.
of doing business in emerging markets. Development, Africa offers the highest
In many cases, the risks are either highly risk-adjusted returns on foreign investment In light of all this, how do Northern multi-
understated or grossly overstated. The same among all emerging economies. nationals move forward to exploit the new
is true with opportunities. Take China, for opportunities arising in the fast-growing
example. Many executives of large com- It’s not just advanced country CEOs who are emerging markets while mitigating the
panies believe they should—and can—do pondering investment in emerging markets. risks? The first critical step is to ensure you
business there.1 From my experience having Powerhouse multinationals out of Brazil, know your customers, your partners, the
worked for two decades in China, the invest- China, India, and South Africa—among oth- particular government with which you’re
ment environment there is far more nuanced ers—are themselves competing across their dealing, and other stakeholders. The best
and complex than most investors appreci- own geographies. At the same time, such way to do this is to carry out tailored due
ate. In my view, it’s a classic case of a place firms are becoming bona fide contenders for diligence, employing different types of
market share in developed markets (North). lenses and techniques and especially by
1 For a recent discussion on China, see “Pearls, pitfalls, and Indeed, not only are the traditional trade using independent, verifiable sources.
possibilities,” Marketmap, Issue 1, 2011.
2 PwC View Issue 15
3. To be sure, carrying out world-class due with an oil company in Vietnam because For more ways corporations can manage
diligence can be more difficult in emerging that’s a high-risk, high-return market. If risk while exploiting opportunities, see
markets since, by definition, their institu- the B2B performs well, the two companies the graphic below.
tions are nascent and their information could replicate the relationship elsewhere
frameworks less developed. I frequently see in Southeast Asia or in another region. This list, of course, is not exhaustive. But
companies rely on self-proclaimed experts it illustrates the type of tactics that, if
in the local economies, only to discover that Business-to-government agreements or adopted, can significantly reduce a firm’s
these people themselves are not the best public-private partnerships are another exposure to risks.
people to have relied upon. The ability to avenue. A multinational engineering and
perform world-class due diligence comes construction company recently signed a Adapting to change
from having done it repeatedly throughout 15-year master service agreement with the The industrial landscape of the world
challenging parts of the world so there is government of Gabon to become an anchor market has changed unalterably. But this is
the capacity to recognize similar problems investor and provide management and just the beginning. There will be multiple
when they crop up, and the information is technical support to the government as it growth nodes from here on out and not just
collected and interpreted by parties who develops a national infrastructure master between the advanced countries and the
are independent to the transaction and are plan. Similarly, a major beverage multina- emerging markets—but within emerging
mutually trusted by all sides. tional has formed a partnership with a large markets. The effect on companies from
private foundation, three African govern- the developed world will continue to be
Such due diligence can be applied in a ments, and a project management entity profound. Adopting an investment strat-
number of ways by foreign investors to that provides for local fruit farmers to sell egy informed by accurate information and
effectively mitigate risks and maximize juice to the beverage’s supply chain, substi- trusted partners with deep local insights
opportunities. One approach is to establish tuting for juice imports. Win-win solutions and experience is the best way to navigate
business-to-business (B2B) alliances. For like these expand the bottom line and also the risk-opportunity tightrope. But the big-
example, a multinational electric power fulfill legitimate objectives on the part of a gest risk in emerging markets could be just
company might establish a B2B agreement government to spur growth and create jobs. ignoring them.
Five more ways corporations can manage risk while exploiting opportunities
1
Prevent, control, and
2
Know the local and
3
Watch operating model
4
Bring local talent into
5
Be a model
contain losses related regional jurisdictional efficiency amid pressure the business and take of absolute
to corruption. nuances. to sustain profits. leadership to the streets. business ethics.
PwC View Issue 15 3
