Emerging markets offer huge growth potential but come with significant risks. Here’s what you need to know to succeed:
- Why Emerging Markets Matter: By 2030, these markets could drive 70% of global GDP growth. Countries like India and Mexico are prime examples of rapid economic expansion, with younger, tech-savvy populations fueling demand in sectors like fintech and e-commerce.
- Key Risks: Political instability, currency volatility, and shifting consumer dynamics are major challenges. Poor risk management can lead to severe financial losses, while effective strategies increase the likelihood of success by 30%.
- Risk Management Tools: Use frameworks like PESTLE analysis and risk matrices to evaluate threats. Monitor geopolitical and economic indicators to stay ahead of disruptions.
- Success Strategies: Build strong local partnerships, hedge against currency risks, and create contingency plans. Tailor products and services to meet local needs, as companies like Netflix, Spotify, and McDonald’s have done.
Key takeaway: Success in emerging markets requires balancing bold decisions with careful planning. Understand the risks, adapt to local conditions, and implement robust risk management strategies to unlock growth opportunities.
Peter MacKay: Corporate Risk Management in Emerging Markets
Core Risks in Emerging Markets
Navigating emerging markets comes with its fair share of challenges, and understanding these risks is crucial. The interconnected nature of these hurdles means that one issue can quickly spiral into others. Below, we’ll dive into three major categories of risks that businesses often face in these regions, laying the foundation for exploring risk assessment frameworks in the next section.
Political and Regulatory Risks
Political instability is one of the most unpredictable threats in emerging markets. These risks can include government interference, wars, civil unrest, terrorist attacks, embargoes, sanctions, and even climate-related challenges. The consequences are often swift and severe.
Take the example of AES Corporation in Georgia. Back in 1998, AES acquired Telasi, Georgia’s electricity distribution company, under a deal that promised a 20% return. But things didn’t go as planned. The Georgian government failed to cut off supply to non-paying industrial consumers, didn’t provide AES-Telasi with the necessary fuel, and even fell behind on its own payments. What should have been a profitable venture turned into a $300 million loss for AES shareholders.
Policy risks add another layer of complexity. These occur when governments unexpectedly change laws, regulations, or contracts in ways that hurt investors. A 2001 PriceWaterhouseCoopers study found that unclear policy environments are equivalent to a 33% tax hike. Similarly, a 2004 World Bank study revealed that 15% to 30% of contracts tied to $371 billion in private infrastructure investment during the 1990s faced renegotiations or disputes initiated by governments. In short, nearly one in four major infrastructure deals saw unexpected government interference.
"After more than 70 years of peace, political risk has been back in the forefront, in various forms, and has punctuated the agenda of many countries in recent years. These risks are clearly on the increase, notably due to the reshaping of the world order and the climate emergency, two major sources of uncertainty and instability for the years to come."
- Ruben NIZARD, North America Economist and Head of Political Risk at Coface
Economic and Currency Volatility
Currency swings in emerging markets can wreak havoc on financial planning and returns. A 10% depreciation of a local currency against the U.S. dollar can lead to a 2% rise in prices, hitting businesses with a double blow: reduced purchasing power for consumers and higher costs for imports. These economic uncertainties often force companies to shift from long-term planning to focusing on short-term survival.
Over the last 20 years, currency fluctuations have cost investors an average of 0% to 1% annually, eating into expected equity returns of 9% to 12%. The table below shows how currency effects become more pronounced over longer holding periods:
| Holding Period | 12 Months | 36 Months | 60 Months | 120 Months |
|---|---|---|---|---|
| Mean total return (local currency) | 12.4% | 11.4% | 10.7% | 9.4% |
| Effect of currency fluctuations | 0.3% | -0.4% | -0.7% | -1.0% |
| Mean total return (USD terms) | 12.7% | 11.0% | 10.0% | 8.4% |
"Currency management is a useful tool when done for the right reasons: because of a high-conviction view, or a desire to mitigate an identified risk exposure."
Market and Consumer Dynamics
Emerging market consumers bring their own set of challenges. By 2030, about 75% of consumers in these regions will be between 15 and 34 years old. This means businesses will need to cater to a younger, tech-savvy, and increasingly affluent demographic with evolving preferences.
Research shows that consumers in these markets prioritize financial security, access to affordable nutritious food, and quality healthcare. At the same time, trust in both governments and large global brands is waning, pushing companies to work harder to establish local credibility and build relationships.
Some companies have managed to navigate these shifting dynamics successfully by tailoring their strategies. For instance, McDonald’s customizes its menu to reflect local tastes, Unilever adapts its products to suit regional customs, and Alibaba has tapped into rural China by expanding its e-commerce platforms. These examples highlight the importance of being flexible and responsive to local needs. Businesses that fail to adapt and simply transplant strategies from developed markets often struggle to gain traction.
Understanding these interconnected risks is the first step toward developing targeted strategies and effective tools to address them.
Risk Assessment Frameworks and Tools
Once you’ve identified the main risks your business faces, the next step is figuring out how to evaluate and rank them. This is where structured frameworks come in – they help you assess potential threats and decide where to focus your energy and resources.
Using PESTLE Analysis for Market Evaluation
PESTLE analysis breaks down risks into six categories: Political, Economic, Social, Technological, Legal, and Environmental. This tool is particularly useful for industries looking to assess risks specific to their market while planning strategies for business growth, workforce management, and product development. Pairing PESTLE with a SWOT analysis can give you a more rounded view of your challenges and opportunities.
To make your PESTLE analysis effective, involve stakeholders and pull data from various sources. Start by defining the scope of your research, ensuring it covers both current realities and potential future scenarios in your target regions. After gathering data, analyze each factor and rank them based on their importance and the level of risk they pose.
For instance, companies like Jessops and IKEA adjusted their strategies during economic downturns to mitigate risks. Amazon, facing significant revenue losses due to currency fluctuations, diversified its operations to reduce exposure.
"In view of the threats to worldwide international trade relations, supply chain managers must be as aware of the political risks as of the risks from natural disasters and economic shocks."
- John Glenn, CIPS economist
To get the most out of PESTLE, set clear objectives, gather comprehensive data, and create actionable plans to address the risks you uncover. Treat it as an ongoing process rather than a one-time task, ensuring it evolves with changing market conditions.
Once you’ve completed your market evaluation, a risk matrix can help you zoom in on specific threats and prioritize them effectively.
Measuring Risk with Impact-Likelihood Models
A risk matrix is a practical tool for prioritizing threats by plotting them on a grid based on their likelihood of occurring and their potential impact. This visual method helps you quickly identify which risks need immediate attention and resources.
Start by identifying risks through collaboration across departments. Use a mix of numerical probabilities and descriptive scales to evaluate their likelihood. When assessing impact, create a standardized scale that accounts for financial, operational, reputational, and legal consequences. Document your reasoning to maintain consistency.
The COVID-19 pandemic highlighted the importance of this approach. In 2020, supply chain disruptions were classified as high-risk, with both high probability and significant impact. Businesses that had robust risk assessments in place were able to act swiftly, diversifying suppliers and increasing inventory to manage disruptions.
Risk prioritization is essential because resources are limited, and breaking challenges into smaller, manageable tasks is key. As Courtney Chatterton of Hyperproof puts it:
"Risk prioritization is the process used by compliance professionals to analyze risks and determine the order in which they are mitigated. It is a process for defining which risks are the highest priority to the business and need remediated first."
Keep your risk matrix updated throughout the year to reflect evolving conditions. Involve key stakeholders to ensure a well-rounded understanding of new and emerging threats.
Using this approach, combined with real-time market insights, can significantly enhance your risk management strategies.
Using Geopolitical and Economic Indicators
Keeping an eye on geopolitical and economic indicators can give you early warnings about emerging risks. Political and social risks, for example, have been on the rise. The Coface political risk index currently stands at 40.2%, with 112 out of 162 countries experiencing higher risks than before 2020. This reflects growing dissatisfaction with political leadership and heightened social unrest driven by inflation and declining trust in institutions.
Geopolitical tensions are also reshaping global trade. For example, maritime traffic through the Suez Canal dropped by over 50% in late 2024 due to geopolitical conflicts. These shifts highlight the need for businesses to continually adapt their supply chain strategies.
Key economic indicators to monitor include capital flows into emerging market bonds, currency values, and commodity prices. GDP growth and equity market earnings forecasts can also guide investment decisions. Emerging markets, for instance, recorded an average fiscal deficit of -2.6% between 2000 and 2022, compared to -3.4% for developed economies. Additionally, JP Morgan’s analysis of over 200 corporate issuers found that net leverage dropped from 2.1x in 2016 to 1.2x by mid-2023, with interest coverage ratios improving to 9.3x.
Thailand offers a positive example. From 2012 to 2022, the country maintained an average current account surplus of 3.4%, thanks to strong manufacturing exports and a thriving tourism industry.
For practical evaluations, use established indices like the World Bank’s Ease of Doing Business Index to assess regulatory environments or the World Economic Forum’s Global Competitiveness Index to evaluate infrastructure. Tools like the OECD’s Trade in Goods and Services Forecast can also help you understand market demand trends.
"(Geo)political risk is now a lasting reality for global trade. Companies are forced to adapt to this multipolar environment, where the regionalization of trade flows disrupts their supply chain and sometimes even their entire strategy."
- Ruben Nizard, Head of Sector and Political Risk Analysis at Coface
Regularly monitoring these indicators and integrating them into your decision-making processes can help you stay ahead of potential challenges. These frameworks provide a solid foundation for developing actionable strategies to manage risks effectively.
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Risk Management Strategies for Emerging Markets
Once you’ve established a solid risk assessment framework, the next step is implementing proactive management strategies to protect your business. Navigating emerging markets successfully requires a mix of local knowledge, financial safeguards, and well-thought-out contingency plans.
Building Strong Local Partnerships
Partnering with the right local entities can be one of the most effective ways to handle regulatory uncertainty and market unpredictability. Local partners bring valuable insights into market dynamics and regulatory landscapes, which can be critical for informed decision-making.
Before committing, conduct thorough due diligence. Assess potential partners’ reputations, financial health, and alignment with your company’s values. Take Starbucks in Nairobi, Kenya, as an example. By collaborating with local farmers and cooperatives, the company sourced all its coffee from East Africa, leading to a 15% increase in customer visits within the first year. This success was fueled by community engagement and support for local artisans.
To ensure smooth collaboration, set clear terms from the outset. Define roles, responsibilities, and expectations in formal agreements. Focus on building partnerships that emphasize mutual growth rather than one-sided gains. Companies that emphasize socially responsible partnerships have seen a 47% boost in brand trust.
Engaging with local regulators and adapting your marketing strategies to the region’s context is equally important. By showing sensitivity to local customs and preferences, you not only strengthen your business but also gain a competitive edge.
These partnerships form the backbone of a comprehensive risk management strategy, supporting both financial and contingency planning efforts.
Financial Protection and Currency Hedging
After building local connections, financial strategies can help secure your investments against economic uncertainties. Currency volatility is a major concern in emerging markets, with 75% of Global 500 CFOs listing it as a top financial risk. A strategic approach to financial planning and hedging is crucial. Start by analyzing your exposure to currency fluctuations and assessing how these shifts could impact your investments. Establish clear objectives and risk tolerance levels before implementing hedging measures.
Common tools for managing currency risks include forward contracts, currency options, and currency ETFs. Forward contracts allow you to lock in exchange rates for future transactions, ensuring cost predictability and protecting profit margins. Currency options, while requiring an upfront premium, offer flexibility by giving you the right – but not the obligation – to exchange currency at predetermined rates.
For example, in December 2022, an investor hedged their exposure to South African bonds worth US$5,009 by selling South African rand forward for 12 months. This approach reduced the cost of hedging to 2.96%, resulting in a net yield of 7.83%.
Diversify your hedging strategies to address varying risks effectively. Regularly review and adjust your hedging positions in response to changing market conditions. Stay informed on global economic trends and geopolitical events, and maintain clear documentation of your decisions to ensure transparency with stakeholders.
"While insurance provides an extra layer of protection against unforeseen events, currency hedging minimizes the impact of foreign currency risk on investment returns." – Editorial Team, HighRadius
Creating Contingency and Exit Plans
Even with strong partnerships and financial safeguards, unexpected challenges can arise. Whether it’s sudden regulatory changes, natural disasters, or political instability, having the ability to pivot quickly is essential. Identify potential risks – such as supply chain disruptions or cybersecurity breaches – and develop tailored response plans. Regularly update these plans to stay prepared.
A well-designed contingency plan should include a clear communication strategy to keep stakeholders informed during disruptions. Train your team to understand their roles in executing these plans, which helps reduce confusion and ensures a coordinated response during crises.
Exit strategies should also be outlined early in the planning process. Consider various scenarios, from best-case to worst-case, and factor in business health, financial goals, and local regulations. Building goodwill through local hiring, partnerships, and community involvement can make exits smoother if the need arises.
Case Studies: Successful Market Entries
These examples highlight how thoughtful risk management can lead to successful market entries. From tackling regulatory hurdles to addressing infrastructure gaps and adapting to local preferences, these cases showcase practical strategies for overcoming diverse challenges.
Fintech Expansion in Southeast Asia
FinVolution’s entry into Indonesia is a prime example of how fintech firms can navigate regulatory uncertainties and financial risks. Back in 2018, this Chinese fintech provider ventured into Indonesia, aiming to serve an underbanked population with limited access to credit data.
Their approach relied on non-traditional data and digital credit models to evaluate the creditworthiness of first-time borrowers. By Q3 2023, FinVolution had reached over 6 million borrowers and facilitated more than $3 billion in loans outside of China, targeting underbanked young workers and small business owners in markets such as Indonesia and the Philippines. This success coincided with a significant drop in Indonesia’s unbanked population – from 63.9% in 2014 to 48% in 2018 – creating a fertile ground for digital financial services.
"Fintech is creating new pathways for underserved populations to access credit and financial support, empowering them to invest in their futures." – Dr. Ming Gu, FinVolution
To navigate regulatory complexities, FinVolution used regulatory sandboxes – controlled environments where new technologies could be tested and refined before full-scale implementation. This method highlights the importance of experimenting with risk management frameworks before scaling operations.
Logistics Solutions in Africa
African logistics companies have shown how technology and partnerships can help overcome infrastructure challenges and political instability. The Dangote Group in Nigeria is a standout example of effective supply chain management in tough conditions. By vertically integrating its operations – from production to distribution – Dangote streamlined processes, cut costs, and mitigated risks tied to infrastructure disruptions.
Infrastructure-related issues are a significant challenge in Africa. For instance, only 40% of roads are paved, compared to 94% in the United States, leading to a 40% loss in productivity and a 2% economic growth deficit annually. Dangote’s strategy of backward integration helped minimize these hurdles.
Similarly, MTN Group addressed connectivity challenges by heavily investing in network infrastructure, ensuring reliable service even in remote areas. This approach allowed them to capture a significant share of the telecommunications market by tailoring services to local needs.
Technology adoption has also played a key role in reducing risks. For example, GPS trackers can cut vehicle losses by up to 80%. Additionally, tools like route optimization software, AI systems, and intermodal transportation (using rail, water, and road) have streamlined logistics and reduced vulnerabilities.
Consumer Tech Localization in Latin America
Consumer tech companies entering Latin America have tackled economic and currency risks with localization strategies and adaptable business models. The region offers immense opportunities, with cross-border e-commerce projected to hit $114.6 billion by 2026, driven by 351 million active online consumers.
DiDi’s expansion into this region highlights the value of gradual market entry and local adaptation. The company built an international technical team spanning Beijing, Silicon Valley, and various local markets, ensuring a tailored approach for each country. Instead of launching all services at once, DiDi focused on understanding local mobility needs and patterns.
"Unlike other companies in the sector, Didi created an international technical team that extends from Beijing to Silicon Valley, passing through different local markets." – Zhu Jingshi, DiDi’s executive vice president
To address currency volatility, DiDi integrated localized payment methods. For example, in Brazil, where 92% of consumers are familiar with Pix and over 75% actively use it, and in Argentina, where over 50% of people rely on digital wallets, these adaptations reduced friction in transactions. Displaying prices in local currencies further simplified regulatory compliance.
Product localization also proved crucial. Brazilian shoppers tend to prioritize beauty and fashion, while Mexican consumers lean toward electronics and home goods. To navigate the fragmented e-commerce landscape, companies partnered with local marketplaces like Mercado Libre, Amazon, and Magalu, reducing reliance on any single platform.
These examples emphasize how tailored strategies and thoughtful risk management can drive success in diverse and challenging markets.
Conclusion: Succeeding in Emerging Markets
Emerging markets, home to over 4.3 billion people and contributing half of global GDP growth, are forecasted to grow by 4.2% in 2025, far outpacing the 1.8% growth projected for developed economies. But tapping into this potential requires more than just identifying the opportunity – it demands a strategic and thoughtful approach.
As Managing General Partner William Bao Bean aptly puts it:
"Emerging markets are not just a place to invest; they require a mindset shift – view them as a mosaic of opportunities, each with its own unique risks and rewards."
Below are key strategies that can help entrepreneurs and business leaders navigate these complex and dynamic markets.
Key Takeaways for Entrepreneurs
- Focus on strong fundamentals. Before expanding, ensure your business has solid foundations and positive unit economics.
- Prioritize segmentation and localization. Companies in regions like India and Southeast Asia with tailored go-to-market strategies have seen compound annual revenue growth 4% higher and profit growth 6% higher than their peers. Adapt your products, pricing, and distribution to meet the diverse needs of different consumer groups and geographic areas.
- Diversify your investments. Spreading your presence across multiple countries can help cushion against risks like currency depreciation. When one market faces challenges, others may provide stability and growth opportunities.
- Leverage technology and data. Use digital tools to gather and analyze data, improve operational efficiency, and gain actionable insights. This can be especially critical in markets with high employee turnover, where sales teams may experience attrition rates of up to 30% annually.
- Foster a resilient company culture. Build a workplace that values employee engagement, open communication, and diversity. Encourage experimentation and learning from both successes and setbacks.
By following these principles, businesses can establish a strong foundation for sustainable growth in emerging markets.
Next Steps for Business Leaders
- Conduct in-depth market research. Evaluate demand, competition, and regulatory environments. Start by testing your value proposition on a smaller scale to minimize risks.
- Begin with a focused approach. Pilot your product with a specific segment to gain insights into local preferences, pricing, and demand. Use this information to refine your strategy before scaling up.
- Tap into local expertise. Partner with local businesses to access established networks, understand consumer behavior, and navigate regulatory hurdles more effectively. Hiring consultants with deep knowledge of the region can also be a wise investment.
- Develop and update risk management systems. Proactively address political, economic, and operational challenges by implementing robust risk management frameworks.
- Focus on what you can control. As Marc E. Seaverson explains:
"In turbulent markets, it’s normal to feel concern and a higher level of anxiety. While the driving factors are beyond your control, focusing on what you can control may reveal unexpected opportunities."
Succeeding in emerging markets is less about avoiding risks and more about understanding and managing them. Businesses that blend thorough preparation with flexibility, build strong local partnerships, and maintain a clear focus on risk management are better positioned to unlock the immense growth potential these markets offer.
FAQs
What are the best ways to manage political and regulatory risks when operating in emerging markets?
Managing political and regulatory risks in emerging markets calls for a thoughtful and forward-thinking approach. One key step is to focus on building strong connections with local governments and influential figures. These relationships can help you better understand and navigate regulations while easing potential political hurdles.
It’s also crucial to perform detailed risk assessments. Keep an eye on political trends, familiarize yourself with local laws, and create contingency plans tailored to specific scenarios. This preparation can make a significant difference when faced with unexpected challenges.
Another smart move is to spread your investments across different markets. This reduces the risk of being overly reliant on a single region and helps cushion the impact of instability. Collaborating with local businesses is another valuable tactic. They can offer deep market insights and bolster your ability to adapt to changing conditions.
By blending these strategies, companies can strengthen their footing in emerging markets, even when faced with uncertainty, while still tapping into their growth potential.
How can businesses use PESTLE analysis to identify and manage risks in emerging markets?
Businesses can use PESTLE analysis as a powerful tool to navigate risks in emerging markets. By examining six critical factors – Political, Economic, Social, Technological, Legal, and Environmental – this method helps identify external challenges and opportunities, allowing companies to make smarter decisions and adjust their strategies when needed.
For instance, evaluating political stability and anticipating regulatory shifts can shape a company’s market entry strategy. Similarly, studying economic indicators like inflation rates or currency trends can guide budgeting and financial planning. Using PESTLE analysis as part of their risk management approach, businesses can better prepare for disruptions, stay adaptable, and strengthen their ability to operate in unpredictable markets.
Why are local partnerships important for overcoming challenges in emerging markets?
Local partnerships play a crucial role in tackling the complexities of emerging markets. These collaborations offer valuable knowledge about local customs, regulations, and consumer behavior, helping businesses sidestep expensive cultural misunderstandings or legal errors. By tapping into the established networks and expertise of local partners, companies can simplify market entry, streamline operations, and navigate challenges like regulatory uncertainty or political instability with greater confidence.
Moreover, working with local partners can boost a company’s reputation and trust among consumers and stakeholders in the region. This trust often serves as the foundation for building strong, lasting relationships, which are essential for achieving steady growth in markets that are both promising and unpredictable. Choosing the right local partners can make all the difference in ensuring success in these ever-changing environments.
