Lure of high-growth emerging markets is strong

For many businesses, taking the plunge into the high-growth regions of Asia, Latin America and the Middle East is a no-brainer. In March, the British Chambers of Commerce forecast that UK GDP growth for 2011 will be 1.4 percent, which compared rather unfavourably with the World Bank’s forecast that China’s growth rate will slow to 8.7 percent from 10 percent in 2010.

While not offering growth rates quite as tantalising, countries such as Russia and India do not lag far behind. With the UK and much of Europe languishing in the economic doldrums, the lure of high-growth markets is strong.

The potential of emerging markets means that 40 percent of the world’s SMEs will be trading internationally within two years - a leap of 11 percent, predicted by HSBC’s latest bi-annual business confidence monitor.

The shift towards foreign trade is put down to a decline in confidence in developed markets and an appetite to explore opportunities in new markets. During 2010, HSBC’s international trade finance lending to UK businesses was up 13 percent with the export component up 43 percent. More than 6,000 SMEs in 21 countries took part in its survey, with just 12 percent in developed countries anticipating any increase in local economic growth - compared with the 43 percent of respondents in emerging markets.

But tapping into the rich vein of opportunity these markets represent is fraught with risk for SMEs; Aon’s 2011 risk map illustrates the dangers. Events in Egypt, Tunisia and Libya highlight the threat that civil unrest can pose, while countries such as Russia and China are often at risk of political interference, and are rife with bribery and corruption, both of which are seen as an inevitable part of doing of business in those regions.

Regulators (and morals) would dictate that bribery is a scourge that needs to be eliminated, but for businesses attempting to gain a foothold in new jurisdictions, it can arguably be the grease that oils the wheels of everyday commerce. Practices considered corrupt at home may be tolerated or even normal elsewhere, and business goes nowhere unless it plays ball in some jurisdictions.

Realities on the ground

The risk of falling foul of corrupt business practices abroad has become even more fraught with the UK authorities adopting a hardball approach through the twice-delayed UK Bribery Act. Under the Act, the offence of bribing a foreign official carries a potential 10-year prison sentence and unlimited fines for directors.

Teymur Huseynov, head of Eurasia forecasting at Exclusive Analysis, which forecasts commercial political risks worldwide, warns that the new legislation in its current form will affect companies’ ability to do business in some emerging markets.

“There are objective realities on the ground,” Huseynov tells Financial Director. “There will be almost zero possibilities to do business without greasing some poles. If the legislation is adopted in its current form, it will affect business.”