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Foreign direct investment in emerging markets -- like this Volskwagen plant in Brazil -- can be lucrative, but also carries risks. (Photo: Volkswagen AG)

Foreign direct investment in emerging markets — like this Volskwagen plant in Brazil — can be lucrative, but also carries risks. (Photo: Volkswagen AG)

Emerging market countries are absorbing more investment than ever before, much of it from large multinationals. More than $886 billion in foreign direct investment (FDI) flowed into developing and transition countries in 2013, an all-time high. And businesses will continue expanding operations into emerging economies as the annual consumption in these markets is expected reach $30 trillion. At the same time, however, the losses companies are incurring in these markets continue to grow. Due to complex regulatory frameworks, multinationals often face multiple risks in these countries, including bribery and fraud. How can companies operate ethically to avoid risks and make the most profit?

FTI Consulting recently surveyed 150 risk and compliance executives from North American and European-based multinational companies with operations in emerging economies in their latest report, What Companies Do Right (and Wrong) in Emerging Markets. According to the report, many multinationals have experienced significant losses in emerging economies due to three reasons: problems with regulation, bribery and fraud, and reputational issues. Regulatory issues are the most frequent cases of profit loss. Bribery and fraud issues are the most expensive. And reputational issues often make a bad situation worse. The most damaging and costly cases happen when two or more of these risks converge.

The companies that suffer the greatest losses are those that under-invest in or insufficiently focus on their projects and subsidiaries in these markets. On the other hand, the firms that flourish in these economies protect themselves against risks by taking the following steps.

To avoid regulatory risks:

  • Study the host country’s regulatory framework before initiating investments and projects, and structure them to accommodate the prevailing regulations
  • Be prepared to stop a venture in a country where the political system is unstable and where compliance may not be possible
  • Continuously monitor proposed new laws, changes and taxes that could affect the company’s operations, and proactive engage with government leaders on these regulations

To avoid bribe and fraud risks:

  • Make compliance a core part of their strategic priority at the executive levels and allocate resources to execute them on the ground
  • Create and implement a culture of compliance—have compliance programs that are relevant both for top-level strategies as well as fit with the realities of doing business locally
  • Hire the right mangers on the ground who have records of integrity and values
  • Conduct due diligence of third parties (contractors and subcontractors)

To avoid reputational risks:

  • Because local population in many emerging economies are suspicious of the motives and actions of multinationals, understand that it takes time and effort to build trust and good reputation in a host country
  • Engage with the local community and the media in a thoughtful, strategic way to communicate the benefits of the company’s investment in the area

Get more insights on how leading, successful multinationals are operating in emerging economies by avoiding these risks by reading the full report.

Maiko Nakagaki is a Program Officer for Global Programs at CIPE.