Fewer than half the companies monitor operating risk of emerging markets investments on an ongoing basis, according to a survey by Economist Intelligence Unit (EIU), an independent thinktank.
In the past three years, the vast majority of companies that already operate in emerging markets have deepened their investments, according to the survey of 177 risk managers by the EIU.
The survey found that 79 per cent of respondents reported an increase in investment, 14 per cent said their level of investment would remain the same and only 7 per cent reported a decrease. These results form part of Operating Risk in Emerging Markets, a newly released EIU survey.
The survey also found that 80 per cent of the respondents manage operating risk (the risk to the business say, for example, from fluctuating raw material prices or labour costs) prior to making an investment as part of the due diligence process.
However, the survey also found that the proportion of respondents who conduct similar assessments on an ongoing basis once the investment has been made drops off sharply. Just 44 per cent say that they continue their risk management efforts and only 30 per cent said they do so on a regular basis.
With many companies deepening their investments in emerging countries, the report examines current thinking and approaches to operating risk in these markets and asks if companies are doing enough to protect themselves against a diverse set of established and new risks, said a press release, quoting the EIU survey.
Rob Mitchell, editor of the report, said, Although most companies that invest in emerging markets recognise the importance of managing operating risk as part of the due diligence process, fewer than half the companies we questioned conduct an ongoing risk assessment once an investment has been made. Given that volatility is a characteristic of many emerging markets, companies that fail to carry out regular monitoring of the environment in which they are operating can easily miss vital risk information and jeopardise their investment. The other key findings are:
(i) An increase in risks and rewards The survey said 55 per cent of the respondents considered the risks associated with investing in emerging markets have increased in the past three years, but a slightly greater proportion (64 per cent) reported that the rewards have also increased.
In other words, respondents appeared to think that the risk/return ratio is becoming slightly more favourable.
(ii) Many companies do not adopt a formal approach to risk. Although there is a clear recognition of the importance of managing risk in emerging markets, with the stability of the political regime identified as the single biggest threat, many companies still lacked a formal process for assessing and managing such risk.
Just 49 per cent said that their company has a formal process for integrating the management of political risk (the risks associated with the political regime in which the company operates) into their investment process.
(iii) Risks force the cancellation of investments Concerns about political risk have forced 65 per cent of respondents to cancel planned investments in emerging markets.
This suggests two important points: These markets are highly volatile and the due diligence processes followed prior to investing by those questioned are fairly robust.
More worrying is the finding that 26 per cent of firms have pulled out of existing investments because of concerns about political risk.