Frank Holder Reveals Emerging Market Investment Dangers
Risk mitigation expert Frank Holder is issuing an urgent alert to all investors thinking of getting into emerging overseas markets. While these markets can prove to be both tempting and rewarding targets for individual investors and companies alike, they do not come without risks. In fact, says Holder, addressing the risks involved in these markets can prove a serious and incredibly difficult challenge to companies.
“In the past several years,” explains Frank Holder, “corporations in America have taken great advantage of the rates of rapid growth and the many movements toward industrialization occurring worldwide by increasing their investments into these emerging foreign markets. The significant investment opportunities presented by these foreign markets have led many American companies to generating as much or more revenue and profit from their overseas market operations as they do from the domestic market here in the United States.”
However, Holder continues, rapid changes in the financial governance and environment of these foreign operations, along with an increase in government scrutiny, have recently changed the atmosphere for these emerging markets. “It is now more important than ever that executives in multinational corporations begin to tighten their control on their financial operations in these international markets,” says Frank Holder. “There are also multiple risks involved that companies need to recognize and take steps to mitigate when dealing in these markets.”
To help these companies spot and avoid these risks, Holder examines the four most pressing of them below.
“This is a major problem that creates a very broad range of difficult business issues,” explains Frank Holder, “not only with a company’s employees but also with the worldwide production and distribution of the company’s products.” These risks, says Holder, are being seen with increasing frequency in emerging markets and include such issues as the following:
Politically motivated violence
Higher overall crime rates
“Corporate executives need to consider the costs of doing business in environments such as this,” explains Holder. “This means reducing profit margins while increasing business expenses, including higher costs for employee retention and recruitment. Ultimately, though, no board of directors will be willing to invest in markets where mass shipment theft or executive kidnappings are likely to occur.”
The infrastructure of a foreign market should be another major concern to any company looking to invest in it, warns Frank Holder. “While emerging markets rich in resources have seen sharply rising commodity prices of late, the strain on their infrastructure has risen just as sharply,” says Holder. “In some African and Latin American markets, this means not enough power to production facilities and too much transportation crowding to make timely commutes possible. In some Asian markets, meanwhile, this means failures in quality control that end with faulty and dangerous products being shipped, only to need mass recalling later.”
“Corruption is the single most pervasive and significant issue that corporate investments in foreign markets need to look out for,” explains Frank Holder. “It’s an issue that can happen to any company’s employees, both new recruits and long-time talent, as well as their advisors and business partners. It can also take the form of third parties looking to compete with a company or somehow profit from its deep pockets.”
Typically, says holder, this corruption takes on one of two major forms.
Corrupt Litigation – The first type of corruption many companies face involves potentially debilitating litigation brought against the company by market natives looking to win large judgments. These litigations can prove endless and unfounded yet result in a company’s assets being frozen and a loss of millions of dollars.
Democratization of Corruption – Some companies also face corruption in the form of a long history of bribing government officials in exchange for special market consideration. This often leads to unpredictable and significant costs to doing business in these markets, not to mention legal issues for any United States-based company that is found to be doing this.
Fraud in emerging markets can be considered a type of corruption, says Frank Holder, though it often comes not in government form but as a conspiracy between employees and vendors. “Traditional fraud prevention methods are usually very difficult in emerging markets,” explains Holder, “since compliance and control mechanisms are often so weak.”
Frank Holder Reveals How to Protect Companies from Foreign Market Risks
“While these challenges can prove quite formidable, the good news is that companies can take specific steps to reduce the risks presented by them,” explains Frank Holder. “These are the three primary courses of action that I most recommend to all executives and board members.”
Be Careful – Holder recommends that companies spend extra time getting to know any party with whom they do business, regardless of the business involved. This extends beyond simple financial and legal review and includes learning the reputation of the player involved.
Promote Regulatory Awareness – Many actions deemed unacceptable by a company in the United States are allowed by the local culture of many emerging markets. Because of this, companies need to ensure that their employees, partners, and customers in these markets are all made aware of their regulations and what they entail for business. This includes training, education, and other awareness tools to spread the word.
Utilize Compliance Resources – Enforcement of a company’s risk management procedures and core values is especially important in these emerging markets where the most risk is imposed. Because of this, companies should focus the most compliance assets in the areas where risk is most often found.
The risks involved in these markets are not going away or diminishing and, unfortunately, they may never. Because of this, says Frank Holder, companies cannot risk waiting out these risks but must instead take decisive action against them whenever doing business in emerging foreign markets.
Frank Holder is the Chairman of the Latin America region of FTI Consulting, one of the world’s premier global business advisory firms. For over 20 years, Frank Holder has directed corporate investigations (including large-scale internal fraud and public corruption investigations) and security consulting assignments in Latin America and the United States. He was the chief executive officer of Holder International, which was acquired by FTI Consulting in 2007. Holder’s excellent ability for strategic insight and advanced level of professionalism make him highly sought after by his clients. Outside of his work with FTI Consulting, Holder is also a frequently published author of books and articles dealing with his areas of expertise including business integrity, narcotic trafficking, and operational risk.