Upside vs Downside of Doing Business in Emerging Markets

President Obama has been leading the charge to increase exports as a highly effective way to boost our nation's economy. I very much agree with this initiative and firmly believe that U.S. companies have superb potential in selling their goods and services overseas. Many foreign markets, especially those in emerging and transitioning countries, offer attractive opportunities for profit, market positioning and growth.

Yet the risks of doing business in some of those countries may far outweigh the rewards. Risk factors range from reputational and financial to health and life. It is crucial to develop a sober risk-assessment framework and view it side-by-side with possible opportunities.

Always evaluate “Upside vs. Downside.” I've told this to my sons for as long as I can remember and when doing business abroad, this maxim may one day save your life.

Do Not Expect Protection

I believe that we should always worry about protecting our four most valuable assets-- life, health, reputation and property. Understanding the downside of every action and transaction is vital. Things are not the same abroad as they are here at home. In the U.S. you can go to court to get satisfaction, call the authorities or the police. But in many foreign countries, especially emerging markets, you are more likely to be confronted by hoodlums, crooked cops, reporters or inspectors who will try to shake you down or bend you to their will. If they don’t get their way, you could become a victim of a shooting or a beating. My advice: Be careful.

You must also try to predict the worst possible outcome of a particular deal and how it could impact your four most valuable assets. It may not always be possible to assess every risk, as in the example above, but an in-depth analysis is needed in every case.

Understand All Players and All Threats

When structuring a transaction, you must understand who the players are, who stands to lose, how much and what are you prepared to do if someone approaches you with a threat, whether veiled or explicit! Will you run, withdraw, proceed, or attack? These are serious questions that require sober and realistic assessments of your capabilities, your reputation and potential damage to your four most valuable assets, as well as your financial condition and your desire to stay in the market.

Then you need to think about this: How likely are you to succeed and reach your dreamed-about lucrative goal, or do you run the risk of being damaged in the process while the opportunity itself is uncertain? This falls into the “worst possible outcome.” Will involvement in the project place you on the wrong side of the political powers of the country you're entering?

More cautions: How secure is your business, your person, your information? Are competitors spying on you? It happens more that you may think, especially abroad. Could you be caught in the crossfire of battling forces and be splattered in the process? What happens if the nation's ruling party, or the senior leadership of your prospective customers changes?

Can You Walk Away?

In the movie “Heat,” actor Robert DeNiro's character defined his strategy for survival: "Don't let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner." A similar strategy should be employed when doing business abroad.

You may be asking, “Why would anyone spy on me, or have reason to harm me? I’m just a simple businessperson and my company sells basic consumer products.” You may be right, but you also may severely underestimate what’s really going on. For example, what if your competitor, a local oligarch, is selling a similar product in the country and dominates the niche, with a solid and consistent cash flow? This person would not take kindly to your intrusion into his market space, and he or she would have the resources to conduct commercial espionage, and may chose to engage in discreditation in the press, or even more sinister activities.

Do you have contingency plans? These could range from leaving the country in a hurry to having a crisis management plan, to medical evacuation insurance or having an idea of where you can borrow a few hundred bucks in case your wallet is stolen.

If your company has physical assets, invest in political risk insurance that covers expropriation, nationalization, terrorist acts, currency inconvertibility and a host of other risks. Insurance may also be available for other politically charged commercial risks when bidding on certain contracts, financing from local banks or bonding customs shipments. Such insurance may be available from Overseas Private Investment Corporation (OPIC), Multilateral Investment Guarantee Agency (MIGA), or private insurance companies.

You also should assess the potential rewards as they relate to the extra risk you take on. Selling your goods or services at a modest mark up, as you may do back home in the face of stiff competition, may not be worth enough if the risks are significantly higher. Even though your product or service offering should be competitively priced, you should NOT be involved in doing business abroad if you are not able to price your services to include all the risks that exist.

If you are not able to evaluate this on your own, hire professional advisors, but make sure your upside is always much greater than the downside.