A recent NY Times article highlights how U.S. financial firms have been expanding into emerging markets in an effort to boost profits in the face of weaker U.S. earnings and rising regulatory costs (see Emerging Markets Offer Banks Profits, but Headaches Too).

Banks like Citigroup, Goldman Sachs and Morgan Stanley are chasing the potential payoff abroad. The economies of countries like China, India and Brazil are growing faster than that of the United States. Such places also represent an untapped client base, with a growing middle class and a large number of wealthy individuals.

As profits wane on the home front, Wall Street firms are increasingly dependent on the emerging markets to bolster their bottom lines…But the perils can be plentiful, with economic, political and regulatory challenges.

…it can [often] take years if not decades to build up local relationships and understand the country’s customs.

Looking to emerging markets for growth is nothing new. And as I’ve mentioned before, although emerging markets hold tremendous promise, they also bring incredible risk. In addition to the economic, political and regulatory risks companies face in emerging markets, there are also cultural risks (see So You Want to Do Business in a Developing Market).

As I wrote several years ago:

There are many compelling reasons that companies look to developing countries for growth. Less-developed countries hold the promise of large, fast-growing consumer markets (e.g., the BRICs); an abundance of cheap labor; and access to otherwise unavailable natural resources. Managers are often lured by this unbridled potential.

But there is a reason these countries are considered “developing” – largely because of the under-developed state of their institutional environments…

Although developing markets hold jaw-dropping potential, it often remains just that. Realizing potential from developing markets is incredibly challenging. Companies often find that the institutional (cultural, political, and economic) environments in the developing markets they enter…are so vastly different from anything that they encounter in their own domestic market (or even in other developed markets) that the costs involved in navigating them exceed even their most conservative estimates.

The bottom line: Decisions to enter emerging markets should not be taken lightly…

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This entry was posted on Friday, October 7th, 2011 at 5:00 am and is filed under International Business, International Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.