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Risk Factors of Doing Business in Emerging Markets OR “Managing Surprises” Richard J. Coyle

Risk Factors of Doing Business in Emerging Markets OR “Managing Surprises” Richard J. Coyle Executive Director, Emerging Markets Institute Samuel Curtis Johnson Graduate School of Management Cornell University March 5, 2013. NAME THE TOP 10 ECONOMIES OF THE WORLD BY SIZE. 2012. 2050.

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Risk Factors of Doing Business in Emerging Markets OR “Managing Surprises” Richard J. Coyle

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  1. Risk Factors of Doing Business in Emerging Markets OR “Managing Surprises” Richard J. Coyle Executive Director, Emerging Markets Institute Samuel Curtis Johnson Graduate School of Management Cornell University March 5, 2013

  2. NAME THE TOP 10 ECONOMIES OF THE WORLD BY SIZE 2012 2050 Source: Goldman Sachs Estimates Source: CIA World Factbook, 2012 4 of the Top 10 economies of the world in 2012 are considered Emerging Markets 6 of the Top 10 economies of the world in 2050 are considered Emerging Markets

  3. 2012 GDP Growth Rates

  4. SOME EVIDENCES OF THE SHIFT Largest Automobile Market- China Largest Oil Producer- Russia Largest consumer of gold- India Million Millionaires- China Largest Producer of Wheat – China Largest producer of engineers – India Country with the most Ph.D.s per capita – Israel Top two countries for cement production – China and India

  5. WHAT CONSTITUTES AN EMERGING MARKET Key Characteristics: High rate of GDP growth, often coupled with low or moderate GDP per capita Evolving regulatory framework, increasingly conducive to doing business Large demand for investment capital coupled with under-developed domestic capital markets Rapidly improving physical and business infrastructure Relative political stability and improving transparency Rapidly improving human development indicators

  6. WHERE ARE THE EMERGING MARKETS? BRIC Countries: Goldman Sachs coined the acronym BRIC to focus on four rapidly growing economies of the last couple of decades • Brazil • Russia • India • China Other Countries: New classifications have been proposed by several groups • CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa • N-11: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam • Poland, Saudi Arabia, Argentina, Philippines, Chile, Czech Republic, Singapore, Romania, Peru etc

  7. What are the risks? • Economic • Legal • Political • Cultural/Linguistic • Reputational • Physical • Technology • Corruption

  8. Economic • Inflation • Argentina, Average Inflation Rate, 1944 – 2010: 215% • Currency Stability and Conversion • Turkey • Repatriation of Profits • China • Infrastructure Development • India & Africa • Unemployment • Greece & Spain

  9. Legal • Expropriation • Argentina – YPF Subsidiary of Repsol (Spain) • Venezuela • Reliable Court System • India vs. China (Guanxi) • Land Ownership • Africa, Parts of Asia, Pacific Islands • Former Communist States • Intellectual Property Protection • China

  10. Political • Membership in multi-lateral trade agreements and political unions • Government Instability • Arab Spring • Taxes, Tariffs and Fees • Regulatory • Protectionism • Keep your company politically-neutral, in case the ruling party changes!

  11. Cultural/Linguistic • Getting Your Advertising Message Right • McDonald’s (China) • Gerber Labelling (Africa) • Pepsodent (South East Asia) • Adhering to local cultural and language protection laws

  12. Reputational • Supply Chain Risks • Factory work conditions (Foxconn) • Child labor (Uzbek Cotton) • Raw material sustainability (Wal-Mart) • Crisis Management • Bhopal Disaster (Union Carbide) • Lead Paint (Mattel) • Media/Government Relations • New Market Entry (Wal-Mart)

  13. Physical • Personnel • Some locations extremely risky for physical safety • Be aware of passport sensitivity is some markets • Kidnap Insurance • Police are not always trust-worthy • Assets • Strong security measures for protection – from theft and natural disasters • Need back-up plans • Business Interruption Risk

  14. Technology • Power Outages • Communication Blackouts • Internet and Media Censorship • Broadband widths • Local support for repair & maintenance • Cyber Risk

  15. Corruption • Can be rampant • May not be viewed as unethical by local standards • Does not conform to the FCPA • May result in loss of sales, intellectual property or other assets and can cause delays in transportation of goods • Role of organized crime • Join with other companies (trade associations) so as to enhance the strength of your voice • Government and media relations are key!

  16. Risk Mitigation Steps • Government Relations – both U.S. and foreign • Media Relations • Trade Associations • Due Diligence • Local Advisors • Back-Up Plans • Good Insurance

  17. Thank you! Richard J. Coyle Executive Director, Emerging Markets Institute Samuel Curtis Johnson Graduate School of Management Cornell University Tel: 607 255 9428 rjc89@cornell.edu www.johnson.cornell.edu/emerging-markets-institute

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