Perceptions and reality in emerging markets

Many emerging economies still face tough social challenges but beyond the negative headlines, there is great investment potential for businesses to tap into.

Most businesses in search of growth will, at some point, consider expanding into an emerging economy. The large, skilled working-age populations and huge, hungry consumer markets that these countries offer are strong pull factors for ambitious businesses. Yet there is often something holding them back from investing: the tough social challenges documented on an almost daily basis by the world’s media.

Mexico and South Africa are cases in point. Last year, Mexico attracted US$28.4 billion of foreign direct investment (FDI). It was a 25.8% increase on the previous year and it catapulted the nation into AT Kearney’s list of the world’s 10 biggest recipient nations of FDI. Yet global perceptions of Mexico are of a nation challenged by drug trafficking, violence and corruption.

South Africa is the single biggest recipient of FDI in Africa – it attracts a quarter of the continent’s total take – yet in many countries outside, the dominant story about South Africa is one of crime, violence and, more recently, poor labour relations.

How do promising emerging economies address this challenge of perception versus reality in order to realise their full potential?

What businesses can do

“Mexico is fighting against organised crime and during this fight we have had a negative reputation,” Mauricio Brizuela, CEO of Grant Thornton Mexico, acknowledges. “So many companies have decided not to come to Mexico [because of that], at least in recent years.”

The Mexican government is taking steps to tackle the country’s social problems but Brizuela says businesses must do their bit too. For Mexican companies looking for investment it means clearly communicating the market opportunities. For those on the outside, that means looking through the negative headlines and finding out the truth for themselves.

The truth is brighter than many might think. Mexico is an economy on the move with a strong set of economic indicators. It grew 2.5% in 2015[i] and is expected to deliver 2.3%–2.8% growth in 2016[ii]. Unemployment stands at 4%[iii] – one of the lowest rates in OECD countries. And at $383 billion[iv], 2015 exports were among the largest of any Latin American country.

Access to a 120 million-people strong consumer market and a large, skilled, competitively-costed workforce are proving to be strong magnets for inward investors. So are efforts to drastically reduce red tape – it now takes just six days to set up a new business – and open up state-owned sectors such as energy and telecommunications to private operators.

Brizuela says the nation is well placed to be a leading Latin American economy and a significant partner for countries in Europe, Asia and neighbouring North America.

How to succeed

“Many foreign companies have been successful in Mexico, despite the violence,” he says. Those who have succeeded have teamed up with a credible local partner who has helped them to navigate the nation’s many challenges and make the right decisions. These decisions include not only how to avoid trouble spots but also how to steer clear of corrupt practices, and keep up with and make sense of complex and frequently changing regulation.

Brizuela says some sectors, such as manufacturing, have done well in persuading companies from all over the world to establish plants in Mexico and those businesses have enjoyed “huge success and excellent profitability”.

It helps that the country is strategically located between markets around the Pacific and Atlantic oceans and is right next door to the biggest economy in the world.  Mexico is also a signatory to free trade deals that give its companies access to 46 other economies, making it an attractive springboard to further expansion and growth.

Positive pulls

Deepak Nagar, National Chairman of Grant Thornton South Africa, believes the negative headlines about his country are actually a positive, demonstrating that South Africa is a fully-fledged democracy with a free press.

That can only be a positive pull for inward investors, who the South African government is actively courting through bodies such as the World Economic Forum, touring the world with trade delegations and negotiating many bilateral trade agreements.

It has much to offer businesses interested in expanding into the country. Alongside developed physical and digital infrastructure, it has a well-regulated and secure stock market, tough banking regulations, attractive foreign exchange provisions and political stability.

Part of the solution

Nagar believes that if the government can use these strengths to attract more inward investors, they could become part of the solution to problems of crime.

“It’s a vicious cycle,” Nagar explains. “If you have a country that grows, it is then able to improve the lives of people. It’s able to increase the amount of jobs in the economy and, by that way, reduce crime because certainly a lot of crime that takes place is from desperate people who are unemployed and have mouths to feed. A lot of it is petty crime.”

The problems can’t be tackled overnight but the South African government has made a start, bringing some of the country’s leading employers together to explore how to address these challenges and take the economy to its next phase of growth.

The prize is great – to become the investment gateway to the entire African continent. However, Nagar says: “We are probably only 50% of the way there because we have set the bar quite high.”

Find out for yourself

The experience of South Africa and Mexico is not uncommon. Many emerging economies find themselves on the cusp of realising their full potential, if only they can counterbalance the bad news with the good to offer a more accurate picture of the reality on the ground.

The message for businesses is clear. Put aside the negative headlines and grasp the opportunities presented by working with experienced and knowledgeable partners on the ground. Not only are you likely to find that the reality is different from the perception, you could also help to start to tackle the problems that might have kept you away in the first place.

Contact Mauricio or Deepak to find out how you can safely take advantage of emerging market opportunities.