The Risks and Opportunities of Doing Business in Emerging Markets
If you’re a startup or small business based in the U.S., chances are that you’re engaging with other emerging markets in some way or another. Perhaps you’re serving customers in those markets – or you have partners, suppliers, or consultants located there – or perhaps some of your team members are based there, or traveling frequently to those parts of the world.
If you haven’t yet tapped into the opportunity and potential of emerging markets, now might be a good time to start. In today’s hyper-connected, mobile, and social world, the Internet and more sophisticated supply chain and fulfillment processes have opened up doors to reach new customer and partner communities. It makes significant business sense to create and scale your local startup to think and act globally.
Why Set Your Sights on Emerging Markets?
Apart from cost-saving factors, emerging markets have become important growth hubs, fueled by a rising middle class, increasing purchasing power, steady economic growth, and improved infrastructure.
Today, we have a veritable alphabet soup of emerging economies, be it BRICS (Brazil, Russia, India, China, and South Africa), CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa), or MINTs (Mexico, Indonesia, Nigeria, and Turkey). By 2016, IMF expects these emerging markets to grow 4.7 percent, compared to advanced economies, which are projected to grow at a rate of 3.8 percent.
For startups and small businesses, the incentive to enter emerging markets is huge. Instead of struggling to be seen and heard in what might be a saturated and highly competitive local market, you might have the opportunity to become a pioneer and leader in an economy that is just getting off the ground. For instance, take South Africa or Nigeria, where nine in ten people have a cell phone, according to Pew Research. Of them, roughly 34 percent of South Africans and 27 percent of Nigerians own a smartphone – this creates a fertile environment for tech startups to bring new mobile products and services to those consumers, much like Vodafone did with its hugely successful M-Pesa in Kenya.
If you aren’t sure about selling your products or services in emerging markets, you might consider partnering with local firms and contracting talent from these regions. While the U.S. population rapidly ages, the workforce in emerging countries like the Philippines, India, Mexico, Malaysia, and Indonesia is quite young, with a median age of less than 30. Tapping into this reservoir of bright, young talent can yield high returns for your business, and there is infinite value in bringing in diverse cultures, backgrounds, and perspectives to your business.
A Word of Caution
While the opportunities in emerging markets are plentiful, there are risks to consider – which is why many small businesses shy away from investing in, or exploring new emerging markets. However, it is possible to keep these risks in check, and to be successful. All it takes is awareness, understanding, and creativity. With that in mind, here are three tips to manage the uncertainties or risks that emerging markets might pose.
1. Know Your Risks
Corruption, political instability, economic crises, logistics issues, or bureaucracy are some of the risks in emerging countries that can disrupt your business plans. When dealing with these risk areas, many businesses tend to assume that the risk management practices applied in one emerging market, or even in their home country, will work in another market. Nothing could be further from the truth. Even though emerging markets are often grouped together as a homogenous entity, the risks and operating conditions in each country are very different.
So, take the time and effort to study every country, and even city-specific issues and potential risks. Understand the local laws, regulations, ethics, and cultural norms. One of the best ways to do this is to partner with a local expert or consultant who has an in-depth understanding of the market, and can help you effectively navigate on the ground. Also, build a network of advisors and trade bodies that can support you through the journey. Perhaps you might also want to consider shifting a team member to the emerging country to understand the local situation better, or arrange for periodic travel there to get better acquainted with the conditions on the ground.
2. Proactively Manage and Mitigate Your Risks
A few years ago at MetricStream, we began evaluating the opportunity to enter the Middle Eastern market. Our market research showed that there was a strong need for GRC (governance, risk, and compliance) solutions there. However, there were also some risks. So, we developed a comprehensive risk mitigation strategy. For example, to manage our investment risk, we decided that instead of setting up a local office, we would find strong local partners and support them from our Bangalore office, which was just a 4-hour flight away.
Similarly, to build market credibility, we launched the MetricStream Middle East edition of our GRC Summits. These annual summits bring together the brightest minds from the GRC community across the region for engaging presentations and case studies, networking opportunities, and the sharing of best practices and ideas. I have also made it a point to travel to the Middle East several times a year to help demonstrate our commitment to the market. Today, we have multiple partners and customers in the Middle East, and are also looking to hire local talent to enable us to continue the positive momentum.
The point is this: if you’re looking to enter another market, or if you’re already in one, it’s important to understand, as well as proactively manage and mitigate your risks. One way to do this is by conducting regular risk assessments. Talk to your partners on the ground to review information and identify any emerging risks. Don’t hesitate to ask questions – due diligence and vigilance are essential.
Also, keep communication lines open between your company headquarters and your partners or teams in emerging markets to minimize any misunderstandings or communications gaps in information that could impact risk decision-making.
Lastly, once you’ve identified, understood, and evaluated potential risks, determine those that are critical or high priority. Then implement best practices and controls to mitigate those risks in a timely manner, conduct regular audits on those areas of risk, and quickly address any issues that arise.
3. Be Creative
McKinsey recently published an excerpt from the book Sales Growth that talks about how Vodafone applied some creative thinking in rural India when they realized that it would be too expensive to establish new distributors across hundreds of thousands of villages. They created a two-tier distribution model, under which they chose local retailers to double as distributors and associate distributors – a model which paid off.
The moral of the story here is that you often need to come up with new and creative ways of growing your business and managing the associated risks of entering emerging markets. Innovation and agility are the keys to surviving and thriving.
How else can you get creative with risk management?
- Adapt your risk model and framework to suit local risks, regulations, and cultural norms such as gift-giving, which may not be well-understood in your own operating environment.
- Empower your local team members who have a great understanding of the regional culture to proactively come up with ideas and best practices on how to tackle any potential risks.
- Understand what motivates your local partners or business teams – be it a promotion, recognition, or pay increase – and then link those incentives to risk management. This will help ensure that your partners or employees understand how important it is for them to identify and manage risk.
Entering into an emerging market can be challenging. It takes perseverance, patience, and vigilance when it comes to understanding, managing, and proactively mitigating any of the associated risks. However, the long-term opportunities for your business can be significant and well worth it in terms of reaching new customers, gaining new business partners, and attracting employees that will help you grow and scale your business.