Magazine article Risk Management

Venturing Abroad: The Challenges of Emerging Economies

Magazine article Risk Management

Venturing Abroad: The Challenges of Emerging Economies

Article excerpt

Extraordinary economic growth rates are spurring an increasing number of organizations to invest heavily in the developing economies of China, India, Eastern Europe and Latin America. While these region are full of potential opportunities, there are an equal number of exposures that must be managed effectively for this vast potential to be realized.

As developing nations progress toward more liberalized marketplaces their political, social and economic systems are undergoing fundamental change. These upheavals, however temporary, may complicate efforts by outside investors to function in these emerging economies. In addition, many resources such as reliable electricity, telephones, office space and qualified workers may not be available. Many international projects face the added challenge of laying the groundwork to establish these basic resources and helping to pave the way for market economies.

Although estimates vary, investment in these regions is growing rapidly and is expected to increase into the next century. A recent report by the World Bank showed foreign corporations invested $90 billion in Third World nations during 1995--triple the amount just five years earlier. Developing nations are expected to contribute a third to,the growth in world trade over the next decade. In contrast, their share was 20 percent between 1970 and 1990.

But foreign investment can only occur when the accompanying risks, often large and complex, can be managed. This is confirmed by underwriting trends. While North America and Europe remain the largest regions in total property/casualty premium volume, their rate of growth is being outstripped by Asia and Latin America. Some nations in these regions are seeing premium growth rates in the 25 to 30 percent range.

Today's Projects

International investments today are taking two basic forms: establishing operations or joint ventures in developing regions and helping former state-run enterprises to privatize. Both create their own opportunities and risk management challenges.

Joint ventures are designed to enable the participants to share each others' strengths and abilities in a united effort. Construction companies in China, for instance, may lack the technical and financial ability to complete a major infrastructure project such as a nuclear power plant. At the same time, U.S. or European companies simply cannot tackle such a project without local participation.

Theoretically, each side is supposed to supply what the other side is missing. In practice, however, uniting complementary strengths isn't always so simple. Potential problems with international joint ventures can easily erupt if the partners misunderstand their roles or place unrealistic expectations on each other. For joint ventures to succeed, it is critical to spell out explicitly the functions each party is expected to perform and who will be responsible for addressing the contractual and liability issues.

Privatization of former state-run enterprises is another strategy being pursued in emerging countries eager to attract international investment. In the manufacturing sector, for example, these investments give companies from developed nations access to products and markets. In many cases, that's about all they receive. The actual products may reflect poor quality standards, outdated designs and inefficient manufacturing methods. In all sectors, employees and managers of former state-run enterprises, accustomed to operating without bottomline scrutiny, will have to adjust to more efficient methods and stricter controls. They may not understand that privatization is not merely changing an operation from government financing to private capital. Rather, they must accept a radical change in operating philosophy to survive. As with joint ventures, misplaced expectations about each other's roles and responsibilities can easily create obstacles to success.

Obstacles to Clear

There are a number of other potential obstacles that must be considered as companies expand into emerging economies. …

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