Multinational corporations long have looked for growth opportunities in emerging markets. But after the Great Recession of 2007-2009, when developed economies effectively froze in place, their appetites only sharpened. And that hunger continues today. In 2014, according to the latest United Nations estimate, direct foreign investment (FDI) in emerging markets reached more than $700 billion — accounting for over half (56%) of all global FDI flows for the first time.
In a study we recently conducted of 150 North American and European-based companies with revenues over $1 billion, we found that along with growth, those investments can generate huge losses — more than $1 billion per responding company over the last five years. Those losses stemmed not from poor product, marketing, or supply chain decisions but from regulatory violations, loss of business and fines resulting from bribery and fraud, and concomitant reputational damage.
Of course, everyone knows that conducting business in some of these markets can be risky. Regimes change, violence can erupt. Crime exacts a toll. Regulations change, often unexpectedly. Corruption and bribery may be more common than in more stable countries.
But how much do these hazards actually cost global companies in emerging markets? Which are the most costly? And, most importantly, how can businesses avoid falling prey to them and contain the losses they produce?
Our survey found that the vast majority (83%) of these companies have suffered significant losses since 2010. The average cost per company over that time has been $1.38 billion, with the cost per incident estimated at $325 million. The average total loss per year was $260 million, or 0.7% of annual revenues.
Those are the costs. What are the risks?
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