Risk management is an essential feature of any investment strategy, allowing companies to operate in profitable but complex—or even hostile—locations.

When investing in countries where political stability or the security environment appears fragile, the need for effective planning is clear, and risk mitigation strategies allow businesses to operate successfully in such environments.

Emerging Markets

Africa is the clearest example of an investment destination where the risks of involvement at first glance appear to outweigh the benefits. The continent has massive potential for investment, with impressive fossil fuel and mineral reserves. Nigeria and Angola are already major international oil exporters; natural gas, metals, and gems abound; and the potential for tourism is huge.

However, there are extreme deterrents to investment. Some countries—such as Angola, Congo (DRC) and Sierra Leone—are mired in war, while others teeter on the brink. Chronic misrule, poor security, unenforceable commercial laws, widespread poverty, and high AIDS infection levels pose further problems. Less dramatic issues can also appear daunting to potential investors: high levels of crime (notably in key markets Nigeria and South Africa), fluctuating currencies, nepotism, corruption, and multiple layers of obstructive bureaucracy all frustrate businesses in Africa.

These problems have ensured that Africa still receives only between 1% and 2% of the world’s foreign direct investment (FDI), currently around $10 billion per annum. Yet the UN Conference on Trade and Development (UNCTAD) World Investment Report 2000 notes that investments in the 54 countries of Africa have offered rates of return on FDI averaging 29% since 1990, between 5% and 15% better than the next-best-developing region. Returns on US FDI in Africa only once dropped below 10%, which was between 1987 and 1997.

Preparation Vital

Foreign investors operate successfully in even the most turbulent countries, such as Congo (DRC). To operate or invest in such environments requires careful evaluation of risks. Standard practice involves pre-entry reports on likely risks to a project, examining not only obvious issues such as political stability and security problems, but also matters such as corruption, external influences, vested interests and their influence on local decision makers, regional tensions, or local labor relations.

Such a report recently allowed a company to decide on the best base for its West African operations, comparing a number of countries, taking into account issues such as the attitude to foreign investment of current and potential leaders and likely infrastructural developments. For longer-term projects, detailed scenario planning has allowed companies to tailor a long-term strategy allowing them to deal with a range of possible developments over five to 10 years.

Businesses that operate in dangerous locations such as Angola rely on professional security planning to minimize the risks to expatriate and local staff. While areas of Algeria, Colombia, or Indonesia may appear daunting, careful preparation to ensure adequate security for residences, offices, and personnel will reassure staff and increase the chances of a successful operation.

Responding to Problems

Corruption, ranging from demands for “facilitation” payments to bribes to secure major contracts, can be one of the most serious operational risks facing investors. There is often a gap between global principles and local realities, and it is essential for businesses to have an effective response to demands for bribery to ensure that they avoid entanglement in corruption—which can bring legal sanctions at home—without losing out commercially.

Organized crime can also pose a major risk to investments. In many emerging markets, legislation does not keep up with the pace of commercial expansion, allowing criminals to infiltrate business. Acquisitions, joint ventures or loan transactions, and theft of intellectual property or technology all present greater risks than in the West. In Eastern Europe and Russia, organized crime is becoming increasingly sophisticated, expanding into complex fraud, money laundering, and “cyber crime,” and attempting to move into established markets.

In many countries, company directors are legally obliged to play an active role in risk management and must report details of this role in annual reports. With courts proving increasingly willing to find directors personally liable for mismanagement of risk, crisis-management planning is an important consideration. Preparation of contingency plans for major threats, clarification of crisis roles and responsibilities, and conducting exercises to ensure effective processes can enable a company to respond effectively to crises such as product contamination or extortion demands.wt

Sidebar 1: Case Study: Dangerous Territory

A company operating in a high-risk African country had to move expatriate and local engineers to a work site each day through an area where an insurgent group operated. An external security coordinator gave careful security recommendations, specifically insisting that the local military provide an advance party despite the commander’s strong opposition. Journeys generally passed off without incident, but on one occasion guerrillas attacked the advance party, inflicting casualties. The engineers’ convoy was away from the danger and returned to base safely. Had the advisor not insisted on the advance party, the company’s employees would have suffered casualties, and operations would almost certainly have had to end.

Sidebar 2: Case Study: Bribery

A European manufacturing company negotiating to set up a project in Eastern Europe suddenly faced a demand for a large bribe. The company commissioned an investigation which revealed that the official depended on the support of a senior official who was likely to lose power in a forthcoming election. The company delayed its project until the official lost political backing, avoiding illicit payments while ensuring the project’s success.

Sidebar 3: Case Study: Organized Crime

A bank considering investing in a recently-privatized industry in Russia commissioned a confidential investigation of the main organizations in the sector. The investigation revealed that several companies had close links with criminal organizations and were involved in laundering money. The report convinced the investor not to proceed, a decision vindicated by the subsequent murder of two directors of one of the industry’s leading companies.

Sidebar 4: One Gateway to Emerging Latin America

Various economic-development regions in the United States have combined the strengths of all their constituent cities, transportation hubs, and industrial areas to better serve international commerce from their respective regions. One such “super region” is the Tampa Bay area.

A population of 3.3 million and gross domestic product of $80 billion.

One of the largest retail and consumer markets in the U.S.

A major airport rated seventh among the world’s airports by Conde Nast Traveler.

Two deepwater ports offering easy access to expanding markets in Central and South America and beyond through the Panama Canal.

One of the largest manufacturing bases in Florida.

The Tampa World Trade Center near downtown Tampa with an array of services including an impressive “Virtual Suites” program that allows a company anywhere in the world to “set up shop” with a Tampa Bay address and to have access to another 350 trade centers around the globe.

Strong degreed programs in business, finance, and engineering health sciences at well-established local universities.

Tampa Bay is also home to the secretariat office for the Gulf States Accord, an international cooperative agreement among the 11 states bordering the Gulf of Mexico in Mexico and the United States. This presents a very real opportunity for Tampa Bay to demonstrate that it is an excellent entry point for trade and access not only to Mexico but to deeper parts of Central America.

For more information, contact the Tampa Bay Partnership, info@tampabay.org.

—Charles Wesley Orton