Doing Business in Developing Economies – 5 Things to Know First

Global growth slowed to its lowest levels in years in 2019, even before the COVID-19 pandemic took hold, according to an AP analysis. The pandemic upended growth projections for the first part of the 2020s as well, and it’s unclear if or when we’ll recover the pre-pandemic trajectory.

Nevertheless, the difference between developed economies and developing economies was stark before COVID and will remain stark after COVID. According to the AP, growth in East Asia, the region that includes China and a number of rapidly growing southeast Asian economies, topped 6% in 2019. Growth in Africa topped 3%. And both regions look set to expand as the world moves on from the pandemic.

The business case for investing in the developing world seems clear. If you’re interested in making your mark here, you might be wondering what more you need to know.

Good question. Let’s take a look at five things to keep in mind before investing in business or infrastructure in the Global South. 

  1. You Need to Understand the Nature of Political Risk

First, and maybe most important of all, you must understand the nature of political and economic risk in developing economies.

Both types of risks are more subtle than commonly assumed. Any investor understands the danger inherent in a military coup that overthrows a democratically elected government, but political risk often manifests in ways that don’t make global news headlines, such as corrupt public bidding processes that systematically favor members of a country’s ruling party or weak private property laws that enable punitive expropriation.

“Reducing these risks at the country level is a foundation without which reducing project-level risks will not lead to increased investment and growth in developing countries,” wrote The World Bank in a 2017 report on foreign direct investment.

Understandably, many risk-averse investors choose to avoid working in countries where these issues are present. That deprives those countries of capital that could strengthen their economies and political systems in the long run.

  1. You Should Work With a Local Partner Who Understands the Environment

If you do choose to work in countries where the rules are a bit different, you need to work with local partners who can guide you through. A sherpa with years of local business experience can help you avoid pitfalls that could threaten your investment.

“Places like southern Africa are rich in opportunity for sophisticated investors, but some are unprepared for the realities of doing business in the developing world,” says Christopher Roy Garland, a Botswana-based business advisor. “It’s immensely helpful to have a local partner whom you can call at a moment’s notice.”

  1. You Should Consider Relative Valuations

High asset prices threaten investment theses everywhere these days. The issue is particularly acute in parts of the developing world, where recent valuation increases are well outside historical bands.

Is this an argument for sitting on your cash and waiting for prices to normalize? Not necessarily; we could well find ourselves in a new, expensive normal. But the present situation does call for a more thoughtful approach. Not every high-multiple opportunity is going to bear fruit, especially not in high-risk markets.

  1. You Want to Be Realistic About Potential Delays and Roadblocks 

Delays hinder development projects in high-income economies as well. But their causes and solutions may be easier to understand there than in developing economies where the difference between “all clear” and “back to the drawing board” very often comes down to who one knows. 

A knowledgeable and determined local partner can help connect you with the correct people and mitigate roadblocks along the way. Still, you should be clear-eyed about the inevitability and possible inscrutability of project delays.

  1. You Shouldn’t Take Assurances at Face Value

When doing business in countries without robust investor protections, it’s important not to take anyone’s assurances at face value (other than trusted stakeholders in your own organization). You’ll want to have local market experts review financial statements and projections, business plans, market analyses, and any other information that factors into your investment decision.

Opportunity Abounds If You Know Where to Spot It

Taking advantage of business opportunities is all about choosing your spots carefully. This is true no matter where you invest.

Despite the clear and compelling business case for investing in the developing world in the years to come, investors need to be careful not to overstep. All the usual caveats, from “do your due diligence” to “avoid promises that seem too good to be true,” still apply here. They’re even more relevant, in fact.

So, by all means, seek out targeted investments in new developing-world opportunities. Just don’t forget to ask the tough questions you need answered before moving forward.


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