News

Theme four - Investing in emerging markets

Faced with recession or, at best, sluggish growth in their core markets, the rationale for investing in developing countries is stronger than ever for western multinationals. Back in the 1970s, when multinationals were first investing in emerging markets in large numbers, few people would have predicted that the Asian coasts of the Pacific Ocean would have been the fastest-growing regions of the world economy. Today, the opportunities for investors are huge, and companies from a wide range of sectors are striving to build a stronger presence in these regions.

Many business leaders at the conference highlighted the importance of a long-term strategy when investing in emerging markets. “You can’t just fly in and get work,” said one. “You need to have people on the ground and you need to stick with the investment through thick and thin.” One speaker divided foreign direct investment in emerging markets into two categories: opportunistic and strategic. Historically, most of the investment in countries such as China has been opportunistic, he said. But as companies recognised the long-term benefits of investment in these markets, there was a shift towards more strategic investments. “When you have growth, foreign investors go in,” he added.

Several speakers highlighted the importance of viewing developing countries not just as markets for products and services, but as sources of talent. With companies increasingly investing in emerging markets for the long haul, and with competition for talent on the rise, it has become vital to nurture talent locally. One leading multinational retailer operating in China described how all its stores were run by Chinese managers who understand local practices. Another speaker said that “we only hire expatriates as a last resort.”

But this trend must go hand in hand with policy efforts on the ground to strengthen education and public health, and to ensure that the right skills are in place for companies to draw upon. “We need to make sure that governments are addressing the need to build more solid intellectual capital,” said one speaker. This is particularly important given that many emerging markets have young populations. They will therefore have a much deeper pool of talent than most ageing, developed countries.

There was a recognition that employee recruitment and loyalty could be improved by demonstrating that the company behaved responsibly. “You need to communicate a sense of values and stick with them regardless of where you are,” said one business leader. “Taking care of the social and environmental footprint is important for a business. People want to work for a company like that.”

Investing in any market has its share of problems, but in some emerging markets the challenges can be acute. Investors considering an investment should ask themselves some key questions, according to one speaker. “Is there significant business to do in that country? Is it safe? Can you do business in an open and transparent way? How is the company’s relationship with the government likely to evolve?”

Another speaker highlighted the need to nurture and develop local knowledge. “Ask the people who know the local area,” he said. “Find out what the local economy looks like.” Investors must also bear in mind the diversity of opportunities within a single market.  “Remember that rural areas can represent massive scope for consumption,” he said. “Explore those parts where there is a need for investment – you are likely to find these markets very receptive.”

Equally, an investment strategy needs to be sensitive to variations in local culture, topography and preferences. Too often, companies try to create an emerging market strategy, or indeed a “China strategy”, without thinking through the huge diversity within these markets. “You can’t lump these markets together,” said one speaker.

Often, the choice of investing in a market depends on a careful investment of risk and return. Although some emerging markets can be extremely challenging places in which to do business, the rewards can be ample to offset these risks. One speaker pointed to Africa as an example of this. “It’s a market of 1bn people and yet there’s not much discussion about it,” he said. “But this lack of attention does create an opportunity for people who are entrepreneurial and prepared to bear the risks of investment. I would go as far as to say that Africa is a paradise for entrepreneurs.”

Companies must not ignore the risks, however. While the overall business environment in emerging markets is improving, executives need to be sensitive to changes in markets that are continuing to evolve rapidly. “The business environment in some emerging markets remains very problematic,” said one speaker. “Companies often tolerate these conditions because they are very profitable markets, but the situation can change quickly and unpredictably.”