1. Risk Factors of Doing Business in Emerging Markets OR “Managing Surprises” Richard J. Coyle Executive Director, Emerging Markets Institute Samuel Curtis Johnson Graduate School of Management Cornell University March 5, 2013

2. NAME THE TOP 10 ECONOMIES OF THE WORLD BY SIZE 2012 RankName of Country GDP in $ B 1USA15,650 4Germany3,367 5France2,580 6UK2,434 7Brazil2,425 8Italy1,980 9Russia1,954 10India1,947 2China8,250 3Japan5,984 2050 RankName of Country GDP in $ B 1China70,000 2USA39,000 3India38,000 4Brazil11,000 5Mexico9,500 6Russia8,500 7Indonesia7,000 8Japan6,500 9UK5,500 10Germany5,000 Source: CIA World Factbook, 2012 Source: Goldman Sachs Estimates 4 of the Top 10 economies of the world in 2012 are considered Emerging Markets 6 of the Top 10 economies of the world in 2050 are considered Emerging Markets

3. 2012 GDP Growth Rates

4. SOME EVIDENCES OF THE SHIFT Largest Automobile Market- China Largest Oil Producer- Russia Largest consumer of gold- India Million Millionaires- China Largest Producer of Wheat – China Largest producer of engineers – India Country with the most Ph.D.s per capita – Israel Top two countries for cement production – China and India

5. WHAT CONSTITUTES AN EMERGING MARKET Key Characteristics: 1.High rate of GDP growth, often coupled with low or moderate GDP per capita 2.Evolving regulatory framework, increasingly conducive to doing business 3.Large demand for investment capital coupled with under-developed domestic capital markets 4.Rapidly improving physical and business infrastructure 5.Relative political stability and improving transparency 6.Rapidly improving human development indicators

6. WHERE ARE THE EMERGING MARKETS? BRIC Countries: Goldman Sachs coined the acronym BRIC to focus on four rapidly growing economies of the last couple of decades Brazil Russia India China Other Countries: New classifications have been proposed by several groups CIVETS: Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa N-11: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam Poland, Saudi Arabia, Argentina, Philippines, Chile, Czech Republic, Singapore, Romania, Peru etc

7. What are the risks? Economic Legal Political Cultural/Linguistic Reputational Physical Technology Corruption

8. Economic Inflation  Argentina, Average Inflation Rate, 1944 – 2010: 215% Currency Stability and Conversion  Turkey Repatriation of Profits  China Infrastructure Development  India & Africa Unemployment  Greece & Spain

9. Legal Expropriation  Argentina – YPF Subsidiary of Repsol (Spain)  Venezuela Reliable Court System  India vs. China (Guanxi) Land Ownership  Africa, Parts of Asia, Pacific Islands  Former Communist States Intellectual Property Protection  China

10. Political Membership in multi-lateral trade agreements and political unions Government Instability  Arab Spring Taxes, Tariffs and Fees Regulatory Protectionism Keep your company politically-neutral, in case the ruling party changes!

11. Cultural/Linguistic Getting Your Advertising Message Right  McDonald’s (China)  Gerber Labelling (Africa)  Pepsodent (South East Asia) Adhering to local cultural and language protection laws

12. Reputational Supply Chain Risks  Factory work conditions (Foxconn)  Child labor (Uzbek Cotton)  Raw material sustainability (Wal-Mart) Crisis Management  Bhopal Disaster (Union Carbide)  Lead Paint (Mattel) Media/Government Relations  New Market Entry (Wal-Mart)

13. Physical Personnel  Some locations extremely risky for physical safety  Be aware of passport sensitivity is some markets  Kidnap Insurance  Police are not always trust-worthy Assets  Strong security measures for protection – from theft and natural disasters  Need back-up plans  Business Interruption Risk

14. Technology Power Outages Communication Blackouts Internet and Media Censorship Broadband widths Local support for repair & maintenance Cyber Risk

15. Corruption Can be rampant May not be viewed as unethical by local standards Does not conform to the FCPA May result in loss of sales, intellectual property or other assets and can cause delays in transportation of goods Role of organized crime Join with other companies (trade associations) so as to enhance the strength of your voice Government and media relations are key!

16. Risk Mitigation Steps Government Relations – both U.S. and foreign Media Relations Trade Associations Due Diligence Local Advisors Back-Up Plans Good Insurance

17. Thank you! Richard J. Coyle Executive Director, Emerging Markets Institute Samuel Curtis Johnson Graduate School of Management Cornell University Tel: 607 255 9428 rjc89@cornell.edu www.johnson.cornell.edu/emerging-markets-institute