Risks and Strategies for Business in Emerging Markets
This paper examines the principal risks and strategic challenges facing international firms that operate in emerging markets. It analyzes foreign exchange rate risk and political risk as the two most significant threats, and surveys strategies companies use to mitigate them, including proxy hedging, local partnerships, and political risk insurance. The paper then explores the role of family conglomerates — using India's Tata Group as a central case study — and explains why partnering with such firms offers foreign entrants superior access to capital, distribution channels, and political insulation. Finally, it critiques average per-capita income as a market-attractiveness indicator, highlighting how wealth concentration, commodity dependence, and uneven development in countries such as South Africa and the Gulf States distort that measure.
- Introduction: Risks of Operating in Emerging Markets: Overview of key risks in emerging markets
- Managing Foreign Exchange Rate Risk: Currency volatility and hedging strategies
- Political Risk and Mitigation Strategies: Political threats and how firms respond
- Family Conglomerates and the Tata Group Example: Origins and growth of family conglomerates
- Advantages of Partnering with Family Conglomerates: Benefits of foreign firms partnering locally
- Why Per-Capita Income Misleads Emerging Market Investors: Four reasons GDP per capita is insufficient
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What makes this paper effective
- It integrates concrete, real-world examples — the Tata Group, South Africa's wealth disparity, and Gulf State oil revenues — to ground abstract economic concepts in observable evidence.
- Each risk category is paired immediately with corresponding mitigation strategies, giving the analysis a practical, applied orientation rather than a purely theoretical one.
- The critique of per-capita GDP as a market indicator is multi-pronged, systematically dismantling the metric from four distinct angles (growth rate, political risk, wealth concentration, and commodity skew).
Key academic technique demonstrated
The paper demonstrates effective use of counterexample reasoning: rather than simply listing limitations of GDP per capita, it deploys specific country cases (South Africa, the UAE) that expose exactly where and why the measure fails. This technique — testing a widely used metric against real-world outliers — is a strong model for applied economics and international business writing.
Structure breakdown
The paper is organized into three thematic blocks. The first addresses risk types (foreign exchange and political) and their mitigation. The second examines family conglomerates as both a market phenomenon and a strategic partnership opportunity for foreign entrants. The third critiques per-capita income as a market-entry signal, working through four distinct reasons the metric misleads. Each section builds on prior context without significant repetition, creating a cumulative argument about the complexity of emerging market evaluation.
Introduction: Risks of Operating in Emerging Markets
There are significant risks and challenges in doing business in emerging markets. Risks inherent any time a firm operates internationally apply — and are arguably intensified — including market risk, cultural risk, competition risk, and economic risk. Two risks that are strongest in emerging markets are foreign exchange rate risk and political risk (Sargeant, 2006). International businesses have developed strategies to counter these risks so that they may enter emerging markets more successfully.
Managing Foreign Exchange Rate Risk
Foreign exchange rate risk, and other forms of economic risk, relate to the higher degree of volatility that firms face in emerging economies. Market highs and lows tend to be intensified relative to developed markets. While this allows for massive growth, it can also lead to tremendous challenges when things go wrong. Foreign currencies pose significant problems in emerging markets for two reasons: they can be exceptionally volatile, and the market in developing currencies is not liquid. Often, emerging market currencies cannot be traded outside the borders of the issuing country. Even when such trade is possible, controls on moving money out of the country may exist.
Companies also have a more difficult time hedging the volatility of emerging currencies because there are no derivatives markets for them, and the primary market is illiquid. Firms can address this problem by avoiding local currencies as much as possible — using dollars or euros when transacting, to the best of their abilities. Where possible, proxy hedges can provide some protection. For example, if an emerging market currency is pegged to a major currency, a hedge can be executed on that major currency. The same logic applies if the emerging market currency is closely tied to the value of a key export commodity, such as a mineral that is mined there or an agricultural product like coffee or sugar. While such hedges are imperfect, they provide a better measure of protection than leaving the company with naked exposure due to the inability to hedge the foreign currency directly.
Works Cited
Gibson, K. (2002). A case for the family-owned conglomerate. McKinsey Quarterly. Retrieved October 18, 2012 from
Rajwani, S. (2011). How should firms deal with political risk? Cranfield University. Retrieved October 18, 2012 from
Sargeant, N. (2006). What risks do organizations face when engaging in international finance activities? Investopedia. Retrieved October 18, 2012 from http://www.investopedia.com/ask/answers/06/internationalfinancerisks.asp#axzz29f2QIadw
Tata.com (2012). Heritage. Tata Group. Retrieved October 18, 2012 from http://www.tata.com/htm/heritage/HeritageOption1.html
Temel, B. (2004). GDP per capita: An accurate gauge or a bum steer? About.com. Retrieved October 18, 2012 from
WRI. (1999). Trends point to gains in human development. World Resources Institute. Retrieved October 18, 2012 from
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