Multinational corporations constantly face an increasingly competitive global environment. Strategically, many corporations have often focused resources on expanding into developed countries that have similar demographics as the U.S., Japan or Europe.  This approach has been pursued due to the significant commercial opportunities, but also since the markets offer relatively more legal and regulatory transparency.

As commercial prospects diminish in developed markets – due to factors such as declining economic growth, regulatory challenges, pricing pressures and patent expirations – corporations are continuously reassessing their international strategies.  One alternative path pursued by corporations has been to selectively expand into what are referred to as "emerging markets," meaning markets that for one reason or another do not meet the capital and market efficiency standards of developed markets.

These emerging markets are not uniform in many respects.  For instance, approaching Asia with the same strategy for each country or market within it, without accounting for cultural nuances, risk factors and political stability, could result in a material misallocation of resources by corporations. Consequently, each country needs to be reviewed for potential on its own merits. 

Despite the substantial economic prospects in various emerging markets, the legal and political environment can be quite opaque while the regulatory framework may still be in its nascent stages. In addition, corporate stakeholders with specific areas of expertise need to be consulted not only prior to market entry but during the early and crucial stages of operations to ensure strategies are being executed in a pragmatic manner. 

Several other important considerations must be taken into account:

• Understanding the distribution network and the value proposition of each prospective partner. Corporations make assumptions on sales projections, leveraging certain distribution models.  Consequently, selecting partners in the distribution network is key and often requires long-term contractual arrangements while improper partnerships could result in derailment of a corporation’s local strategy as well as increased operational risk to the parent.

• Forming the initial local market team. This team will drive the execution of strategies in coordination with headquarters.  Colleagues should be identified and selected based not only on development potential but on their experience in fluid situations.  Although certain internal colleagues may possess a solid track record, their competencies and experience may only be in structured markets, which would not always be suitable for fast-paced and volatile operating environments.  Interaction and relationship-building with regulatory agencies is crucial for all corporations regardless of country, so it is important to deploy senior colleagues with this specific competency.  In certain cases, personnel may need to be recruited externally due to lack of internal expertise.

• Implementating standard operating procedures and financial reporting platforms. To ensure operating efficiencies and alignment with corporate values, standard financial reporting tools and adequate training resources must be provided to the local team along with the establishment of a robust compliance education program.

• Determining the operational construct and selection of local partners for distribution of a corporation’s products. This decision will have repercussions for years. In certain strategic markets, a strategy could be to establish a fully staffed legal entity and may even include the formation of a local manufacturing process. Conversely, in other markets, there may be rationale for selecting a local business partner for a business collaboration or joint venture.  A governance process relating to operating constructs that ensures multi-functional input – including tax, manufacturing, legal, sourcing, policy and strategy – should be established.

Ultimately, the potential for success in emerging markets can be greatly enhanced by executing the following Best Practices: 

Best Practice 1: Develop comprehensive risk models.

Identify appropriate risk factors for each market, establishing respective weightings to ensure that corporate exposure is quantified and properly mitigated.  Since each corporation will determine its risk tolerance level, these models will be calibrated to invoke discussions and decision points as required.

Best Practice 2:  Assess the financial and operational resources required. 

Construct a standard model to ensure efficient allocation of capital, in conjunction with a governance board.  There will always be situations relating to investment decisions involving multiple emerging markets.  The model should be flexible to enable senior management to make quick decisions in a transparent manner while aligned to corporate values.  

Best Practice 3: Create a local team that can execute corporate strategies.

Identify key colleagues who are capable of successfully executing strategies in challenging markets, which is as crucial as the formulation of the strategy itself.  Incentivizing colleagues to lead local market teams requires overarching corporate talent strategies along with atypical approaches to retain and motivate high-potential individuals.

Best Practice 4: Establish the appropriate organizational and legal construct.

Determine the proper construct for each country or market based on multiple factors, including growth potential, market access, regulatory environment and risk profile.  There may also be opportunities to achieve operational synergies by deploying specific functional colleagues to lead several markets possessing similar characteristics.  

Best Practice 5: Provide adequate oversight of joint ventures and business collaborations.

Local management in conjunction with corporate multi-functional teams proactively monitor commercial partnerships to ensure compliance with US GAAP, adherence to contract terms and the identification of potential triggers for write-downs.  Establish a clear delineation of roles and responsibilities between legal, finance, market management and other headquarters functions.