Challenges And Risks Of Doing Business In Emerging Markets: An Essay.

Investigate and explain 4 risks and chellenges of doing business in emerging market.

Cultural Differences

Emerging marketing are economies that are emerging in developing countries to present viable opportunities for investors who wish to expand globally (Ayub, 2016). When the less developed countries become more developed, they provide business opportunities for investors. These opportunities do not come alone. They come with challenges and risks which companies need to be aware of before implementing their expansion plans.

According to Palitha (2017), investors target emerging markets because of different factors like population growth, cheap labor, economic growth, industrialization, and so on. Some of the challenges and risks faced by companies which expand to emerging markets include cultural differences, language barrier, and competition from local companies, corruption, and political and social issues among others.

One of the challenges of undertaking business in emerging economies is the problem of overcoming cultural risks (Cavusgil et al., 2012). Cultural aspects like rituals and perception to product vary from one country to the other, and when new economies emerge, they may have varying expectations than the ones where a company is established, hence making the management to experience challenges in trying to establish strategies for coping with the differences. For example, an Australian company may find it challenging to cope with cultural differences between Australia and that of emerging market Brazil, china, India and other emerging markets in the 21^st century.

Cultural challenges in emerging markets are driven by how people perceive some products, work, or any other aspect which may influence the success of an organization (Farzad, 2012). For example, the success of an Australian company dealing with food and beverages may be impacted in china because the Chinese do not take some foods or beverages which the company offers, or any other belief which impacts the day to day operations of the company.

Dealing with cultural differences is challenging because it leads to change resistance especially when the company tries to convert employees from one culture to the other. According to Mercan (2016), change resistance leads to a serious challenge in attempts to create a work environment which fosters teamwork and harmony. This factor affects employee morale especially when the management is not able to address the issue.

Cultural differences also make it challenging for investors to exercise their leadership styles (Cavusgil et al., 2012). If for example, an Australian autocratic manager manages a company in India, he or she may experience the challenge of exercising this kind of leadership and may be forced to adapt another kind of leadership style. If a leader uses the leadership style which he or she is not used of, the chances of delivering bad leadership are always high because of being forced to do what he or she is not able to do.

Political Risks

According to Nelson (2011), Political risks refer to the uncertainties caused by adverse political decisions. Developed nations tend to follow a free discipline of low government interventions, while most of the emerging market enterprises are mostly privatized upon demand.  Other additional factors which contribute to political risks include tax increase, possibility of war, subsidy, lack of ability to regulate inflation and laws concerning resource extraction, change of market policy among other factors.

Emerging markets are also characterized with unstable governments (Cavusgil et al., 2012). Investors find it risky to invest in such countries because political unrest can lead to serious consequences to not only the economy but also to companies. If for example the system of government is changed from time to time, or there are political systems which do not favor the success of enterprises, the chances of experiencing difficulties in running businesses in such countries are always high.

Most of the emerging markets started their economic improvements as a result of political changes (Mercan, 2016). For example, most of the developing countries in the Western Europe were initially communist states that had to stay in good graces with the Soviet Union. Currently, most of them are parliamentary democracies with market economies. Most of the countries with emerging markets in the Eastern Europe have also had economic and social upheaval on the way to economic stability. This means investing in such countries is highly risky

Social risks can take the form of ethnic unrest which complicates various factors which impact organizations like hiring, supplying of products, addressing customer needs and so forth. Such unrests may come in form of strikes or even boycotts (Ephraim, 2012). Investing in countries which experience these kinds of issues is highly risky because the chances of failure are always high especially when proper strategies of addressing the issues are not taken. 

According to Ramachandran (2010), corruption is among the worst barriers of business success because they can lead to far- reaching consequences, including shutting down of a company.  The issue of corruption is still prevalent is some of the emerging markets. For example, India is one of the emerging markets and is ranked top 90 on the corruption perception index. China is also another emerging market and is also ranked among the most corrupt countries in the world. This means doing business in these countries is both challenging and risky because investors will need to look for strategies which they can use to ensure staff members do not engage in corruption related matters while on job.

Social Risks

Corruption takes many forms which can comprise of bribery, misappropriation of funds, and misuse of office by the managers, graft, and dishonesty in handling financial matters (Ephraim, 2012). Irrespective of having business opportunities, corruption in the emerging markets reduces credibility as well as profits when professionals misuse their positions with the purpose of obtaining personal gains.

The culture of corruption impacts businesses in a number of ways. First, it makes what should not be done to be done (Ayub, 2016). For example, if a company deals with financial services like banking and there are certain requirements which a client must meet in order to me given a loan, corruption may make unqualified people to attain the loans, hence making the company to experience challenges especially when the client defaults.

Corruption in emerging markets can also make a company to have unqualified employees especially when the HR department is made up of corrupt personnel (Ephraim, 2012). In most of the emerging markets, employment is an issue and therefore people do anything to attain jobs. Some of them end paying a lot of money in order to be favored during recruitments. When this happens, the HR personnel mostly consider money more than qualifications and hence end u recruiting unqualified candidates.

Another challenge of investing in corrupt countries is that it makes companies to lack transparency especially in matters concerning financial statement preparations, analysis, and reporting (Cavusgil et al., 2012). If for example, internal or external auditors are corrupt, organizations end up getting wrong information concerning their financial issues, hence leading to issues which may lead to collapsing of the organization. This factor makes it challenging and also risky to operate businesses in the emerging markets which are associated with corruption because managers must scrutinize all employees to ensure they have high levels of integrity.

Doing business in corrupt countries is challenging because in some cases especially when an organization is involved in a situation which requires legal action makes it to end up not getting justice because the judicial system is filled up with people who are after personal gain and not giving people and organizations the justice they require. When this happens, companies lose a lot of money or may end up closing down because of matters which would be judged in their favor.

Corruption issues in organizations can also make investors and shareholders to lose trust and confidence in the business (Ephraim, 2012). It also makes organizations to lose resources worth a lot of money through grafts or fraud. Corruption also makes resources that could be used in assisting the company to attain its goals to be derailed or used inappropriately. The impacts of doing business in emerging markets associated with corruption are many and that is why investors feel it challenging to expand their businesses to such countries.

Corruption

Lack of common language is also another issue which impacts doing business in emerging markets. Common language is important because it helps all stakeholders in an organization to communicate effectively (Mercan, 2016). Some of the emerging countries do not use English as one of their languages and this factor makes it challenging for investors from other countries. For example, an Australian company expanding to china may lead to communication challenges because the country mostly relies on Chinese as its main communication language. Understanding Chinese for the Australians may be challenging because the majority of Australians are used to speaking in English.

A language barrier is a challenging issue and sometimes addressing it requires an organization to spend money. Most of the companies which expand to emerging markets where communication is a problem rely on translators as the only option of addressing the issues (Ramachandran, 2010). Sometimes relying on translator may not be an effective strategy because one is not always sure whether they translate the right thing.

Before implementing expansion decisions, investors consider several factors which influence the success of their businesses (Ayub, 2016). Some of these factors include how to train, motivate, recruit and coach employees. Attaining this expectation without a common language is challenging because managers cannot communicate their decisions effectively to the employees.

Language barrier also makes a foreign company to experience the challenge of retaining customers (Mercan, 2016). In situations where a company has employees who cannot communicate effectively or who do not understand the language used by customers, the chances of losing the customers are always high because consumers like purchasing or being associated with companies which understand their needs. Recently, the most popular emerging markets comprise of the BRICS (Brazil. Russia, India, China and South Africa) and most of these countries uses language which is challenging for international investors (Cavusgil et al., 2012). For example, the biggest percentages of Chinese population do not understand English. This means an investor who is used to communicating in English may need to learn Chinese or hire a translator.

Lack of common communication affects an organization in many ways. For example, consumers must communicate to express want they need to purchase, the company must communicate through advertisement and other promotional tools to inform the buyers what it sells, employees should also communicate to share ideas and experiences. This means doing a business in a country where there is a language barrier may lead to reduced sales, low profitability and even collapsing of an organization.

Language Barrier

Conclusion

Doing business in emerging markets has various risks and challenges which investors need to be aware of before implementing their expansion decisions. Some issues associated with these markets like for example language barriers can make an organization to experience a challenge in retaining customers, establishing teamwork, and other factors which are crucial to the success of a company. Corruption also poses a challenge in investing in emerging markets because some of the countries associated with these markets are still prevalent to this issue. Corruption impacts a business in different ways. For example, it makes organizations to lose money and other resources because of fraud. Some of the political issues like instability, wars among others may make it risky to operate businesses in the emerging markets because they lead to low profitability, high employee turnover or even closing down of firms.

Finally, cultural differences and social factors make investing in the emerging markets to be challenging because managers are sometimes forced to use leadership styles which they are not used of and also are required to deal with change resistance especially when the organization decides to transform the employees from one culture to the other. Before implementing the decisions to invest in the emerging markets, investors need to think on how to handles these challenges because if not well addressed they may lead to not only reduced sales but also may make an organization to shut down.

References

Ayub, S. M. 2016.  Estimating Short Run and Long Run Coefficients of Fundamentals Factors with Growth and Momentum Factor: Evidence from Emerging Markets. Australasian Accounting Business & Finance Journal 10(4), 124-135.

Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Freeman, S. 2012. International Business: The New Realities 2nd Edition (Australasian edition). Frenchs Forest: Pearson

Ephraim, M. Y. 2012. Western presence in Emerging Markets: content Analysis of Western Presence in South African Television Commercials. International Journal of Marketing Studies, 4(2), 34-56

Farzad, A. H. 2012 Rethinking the Institutional Contexts of Emerging Markets through Metaphor Analysis. Management International Review, 52(4). 67-78.

Mercan, S. T. 2016.  Financial Crises and Stock Market Behaviors in Emerging Markets. IUP Journal of Applied Finance, 22(4) 201-225.

Nelson, T. P. 2011. Entrepreneurship in Emerging Markets: Strategies for New Venture Creation in Uncertain Institutional Contexts. Management International Review, 51(1), 456-487.

Palitha, S. V. 2017. Institutional Distance and Foreign Subsidiary Performance in Emerging Markets: Moderating Effects of Ownership Strategy and Host-Country Experience. Management International Review, 57(2), 56-89.

Ramachandran, K. 2010. Winning in Emerging Markets-A Road Map for Strategy and Execution. Indian Journal of Industrial Relations, 46(2), 78-110.