Risk Factors of Doing Business in Emerging MarketsOR

“Managing Surprises”

Richard J. CoyleExecutive Director, Emerging Markets Institute

Samuel Curtis Johnson Graduate School of ManagementCornell University

March 5, 2013

NAME THE TOP 10 ECONOMIES OF THE WORLD BY SIZE2012Rank Name of

CountryGDP in $ B

1 USA 15,650

4 Germany 3,367

5 France 2,580

6 UK 2,434

7 Brazil 2,425

8 Italy 1,980

9 Russia 1,954

10 India 1,947

2 China 8,250

3 Japan 5,984

2050Rank Name of

CountryGDP in $ B

1 China 70,000

2 USA 39,000

3 India 38,000

4 Brazil 11,000

5 Mexico 9,500

6 Russia 8,500

7 Indonesia 7,000

8 Japan 6,500

9 UK 5,500

10 Germany 5,000

Source: CIA World Factbook, 2012 Source: Goldman Sachs Estimates

4 of the Top 10 economies of the world in 2012 are considered Emerging Markets6 of the Top 10 economies of the world in 2050 are considered Emerging Markets

2012 GDP Growth Rates

Rank Rate26 727 6.828 6.829 6.830 6.531 6.532 6.533 6.334 6.335 6.236 6.237 6.138 6.139 640 641 642 643 644 5.745 5.746 5.747 5.648 5.549 5.450 5.3

KuwaitBurmaNiue

Gabon

EthiopiaSri LankaTajikistan

AngolaCambodia

Zambia

Country

Mauritania

West BankEquatorial Guinea

VenezuelaThailand

KazakhstanIndia

BangladeshIndonesia

Saudi ArabiaGeorgiaGibraltar

Peru

TanzaniaQatar

Rank Rate1 21.32 20.73 14.54 12.75 116 10.27 108 9.99 910 8.511 8.312 8.213 8.114 815 7.816 7.717 7.718 7.519 7.520 7.421 7.422 7.323 7.124 7.125 7

Sierra LeoneMacauNiger

Mongolia

IraqTimor-Leste

BhutanLiberia

Panama

GhanaCote d'IvoireTurkmenistan

ChinaRwanda

EritreaMozambique

UzbekistanSolomon Islands

Chad

NigeriaBurkina Faso

Country

Afghanistan

Laos

Papua New Guinea

Democratic Republic of theCongo

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

WHAT CONSTITUTES AN EMERGING MARKETKey Characteristics:

1.High rate of GDP growth, often coupled with low or moderate GDP per capita

2.Evolving regulatory framework, increasingly conducive to doing business

3.Large demand for investment capital coupled with under-developed domestic capital markets

4.Rapidly improving physical and business infrastructure

5.Relative political stability and improving transparency

6.Rapidly improving human development indicators

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

What are the risks?

• Economic• Legal• Political• Cultural/Linguistic• Reputational• Physical• Technology• Corruption

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

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

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!

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

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)

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

Technology

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

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!

Risk Mitigation Steps

• Government Relations – both U.S. and foreign

• Media Relations

• Trade Associations

• Due Diligence

• Local Advisors

• Back-Up Plans

• Good Insurance

Thank you!

Richard J. CoyleExecutive Director, Emerging Markets InstituteSamuel Curtis Johnson Graduate School of ManagementCornell UniversityTel: 607 255 9428rjc89@cornell.eduwww.johnson.cornell.edu/emerging-markets-institute