|By Green, Paula L|
This year has already proven to be a wild one when it comes to emerging markets risks. Preparing for what is to come in volatile and disparate markets is ever more central to the treasury and risk management functions.
Doing business in developing countries was never for the faint of heart-whether a multinational was setting up a garment factory in
As political risk consultancy
INCREASINGLY COMPLEX MARKETS
"The countries are different today, [and] the risks are bigger," said
In addition, corporate boards have greater expectations of their risk managers' role in helping them navigate a politically volatile world, says
The risks faced by a multinational can shift, depending upon a host of factors, including its home country and industry. "All risks vary according to image and perception of the company involved," says
Despite the concerns, the persistent pressure to reduce costs is driving more companies' supply chains into less-developed economies, where the risks may be greater. "This [dynamic] is made more complex by increasing insured values and by greater concentrations of risks in key areas," says
Companies often overlook evaluating how resilient their suppliers or production facilities are to a local catastrophe. It is essential to pinpoint how quickly the supplier can recover or transfer production to an alternative facility. "They [risk managers] are asking: 'Is the local infrastructure sufficiendy robust to allow a fast recovery in the event of a flood or windstorm?"' notes Muench.
Bidmead of Marsh agrees that business resiliency plans, which take a company beyond the immediate conditions of the crisis and keep it operating smoothly, are crucial. "Companies need to be nimble in a number of ways," he says. Using a muld-stage approach to gauge a country's risks will help executives pinpoint which risks need to be transferred to an insurer.
And the key reason the risks are greater is that companies have more substantial investments in emerging markets today. "Years ago, a company might enter
Holt at Willis believes, however, it is smaller multinationals that are most at risk. "It tends to be the medium-size companies or branches of multinationals with no incentive or capacity to analyze risks in-country that fail to spot the threats. [They] are therefore reactive in terms of risk and possibly in terms of business opportunity," says Holt. "Risk prevention and response are dramatically dulled by an inadequate understanding of the political, economic and security dynamics of the arena of business."
The key is holistic management of global risks.
Buthusiem points to the recent corruption scandal surrounding
"You have to know your environment...to understand the culture and the business models [if you want] to understand how bribes happen in the local culture," says Buthusiem.
With compliance officers sitting at head offices in
Another oversight sometimes made by companies is sending inexperienced executives to run their operations in obscure markets with reputations for corruption. "Human resources will take a CFO or IT person and send them to
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