Emerging markets offer the potential for first mover revenue advantages as well as being a low cost location of production. As developing economies transition into mid-level economies they enjoy a growth in the middle-class population, with the associated increase in disposable income and desire to access global products. This generates improved opportunities for canny businesses.
There are, however, a number of considerations to keep in mind before deciding to set up shop in an emerging market. I have listed below some of the legal and compliance challengescommonly found in emerging markets. Not all markets will share these features and, of course, there is a degree of generalisation to this exercise. Nevertheless, if you are looking to expand your business into an emerging market it would be worthwhile keeping these points in mind:
- Concentration of Ownership – Many emerging economies have ownership of major industries and resources concentrated in the hands of a relatively small group of elites. These elites will likely be politically connected and will often be in a position to control foreign access to the local market. This is generally seen in the form of laws requiring minimum levels of local ownership or participation (often in excess of 50%). And while having local partners who are able to procure the necessary approvals and licences and even local funding through their network of affiliates can be advantageous, it is not without dangers. Such proximity to the levers of power can be problematic in the event that you develop a dispute with your local partners or your local partners (after having developed the necessary expertise) decide they can now run the business without your assistance. Doing business with close associates of government officials, if not directly with the officials themselves, also generates significant risks of payments or other benefits being viewed as bribes.
- Corruption – Transparency International conducts a regular survey of perceived corruption in each country. While even the most developed economies still have issues with corruption, it remains a scourge and blight on developing economies. Some people may view bribes and other facilitation payments as the price of doing business in a country. That view is simply wrong. The price of doing business is the cost of doing everything you can to comply with the local laws and regulations, such as they may be. If paying a bribe is the only way to do business then it is not the business you want to be in, or can afford to be in. Seriously, do not pay bribes; it undermines the efforts of local people who are trying to improve their country and undermines your position should you ever find yourself in a dispute with local counterparties. And if that isn’t enough, paying bribes in foreign countries is almost certainty against the laws of your home country. Laws such as the UK Bribery Act 2010, the US Foreign Corrupt Practice Act and the OCED Anti-Bribery Convention, to name just a few, all have extra-territorial application (i.e. it does not matter where you live, the laws will still apply to you) and will apply to all forms of bribery irrespective of where the bribery actually occurs.
- Laws and Regulation –Emerging and developing economies will generally not have the deep and well established legal and regulatory framework that one might expect to see in an OECD country, for example. This absence of a clear legal framework will make it difficult to determine whether your business or products are in compliance with local laws; local legal advice will often amount to a best efforts guess. It will also open up the potential for local authorities to be creative in their interpretation and application of those laws, creating ample opportunity to extract bribes or simply offering a convenient means of managing the level of activity in one part of the economy. Arenburg Consulting has first-hand experience with several local law enforcement agencies that have imposed new, restrictive interpretations of laws on foreign owned enterprises as a means of communicating their desires to locally owned enterprises. There is even a term for it: ‘shooting the chickens to scare the monkeys’.
- Rule of Laws –Even when the laws are present, if the rule of law is compromisedin the local jurisdiction you will find it very difficult to successfully enforce your contracts. The rule of law does not have to be especially compromised before you will find yourself in an uphill battle to win disputes against local counterparties. And again, if the dispute is with an entity that is in some way associated with the government the prospects of success are even more remote. Remember, even where corruption is not endemic, in a dispute against a local party you will be perceived as the ‘rich’ outsider. It therefore should not come as a surprise when a court comes up with legal interpretations that favour the local party in a dispute.
- Sophistication – Even though an economy might be struggling with limited infrastructure or limited commercial development it is important to remember that international travel is increasingly common and good education is frequently available to many people in developing economies. While it may be difficult to find people with the same qualifications that you would normally employ in your home jurisdiction that doesn’t mean there won’t be a lot of people with global experiences backed up by some very good education. Many locals will be fluent in several languages and will be very capable and able to upskill quite quickly. Making the most of local talent will deliver dividends beyond the immediate business returns.
- Creative Solutions – The challenges of corruption and lack of infrastructure in emerging economies creates opportunities,and the need, for creative solutions. Don’t expect the same approach to solving problems that you are accustomed to in your home country but equally don’t dismiss local solutions as they are invariably informed by local experiences and will often be far more effective. Managing the interface between your global business model and the local business environment must involve understanding how the local business environment functions.
- Cost Base – It is widely understood that the cost of living differential between developed and emerging markets creates an opportunity to reduce production costs. However, the frequent absence of developed regulatory frameworks combined with corruption can mean that local staff are exposed to exploitation by local firms engaged by offshore businesses. The cost base differential that makes a jurisdiction an attractive production base also means that a relatively small increase in wages and working conditions can have a big impact on the lives of local staff. This big impact-low cost dynamic imposes a moral obligation on offshore businesses to ensure their local staff are properly paid and work in safe environments.
Before entering into business projects in emerging markets it is worth speaking to someone who has experience in working in the jurisdiction to get a real-world view of how to ensure you and your business are not exposed in what can sometimes be a very unpredictable and challenging environment. The team at Arenburg Consulting has experience in successfully leading business development projects in countries as diverse as Angola, Saudi Arabia, Mongolia and Myanmar.