Jonathan PrewittAh, emerging markets. The phrase alone can make a CEO’s eyes light up with visions of untapped potential and explosive growth. But if you’ve spent any time navigating these high-risk, high-reward environments, you know that there’s a lot more to the story than just dollar signs and new customers. Sure, emerging markets like India, Brazil, and sub-Saharan Africa offer incredible opportunities for businesses ready to expand—but they also come with a healthy dose of political risk.
I’ve seen plenty of companies make the leap into these markets only to be blindsided by a sudden government change, a corrupt local official, or a regulatory overhaul that turned their business plan upside down. Emerging markets are, by definition, unstable. They’re developing, they’re evolving, and with that comes a lot of unpredictability. And while that volatility is what makes them so ripe for growth, it’s also what makes them so risky.
In this part, we’re going to talk about how to navigate the political risks that come with emerging markets. From weak institutions and sudden policy changes to corruption and currency instability, we’ll cover the major challenges you’re likely to face—and how to manage them without losing your shirt. We’ll also look at a few real-world examples of companies that have thrived in these environments (and a few that didn’t) to see what worked, what didn’t, and what lessons we can learn.
Because here’s the truth: if you can manage political risk in emerging markets, you can unlock a whole world of growth. But if you don’t prepare for the chaos, you’re setting yourself up for a very expensive lesson.
Understanding Political Risk in Emerging Markets
Emerging markets are often viewed as the next frontier of business growth, but they come with their own set of political risks that are significantly different from those in more stable, developed economies. The allure of expanding into these regions is undeniable—growing middle classes, untapped resources, and fast-paced economic growth—but let’s not fool ourselves. The political landscape can be volatile, unpredictable, and, at times, downright hostile to foreign businesses.
When I think about political risk in emerging markets, it’s not just about who’s in power at the moment. It’s about the foundations of governance—or lack thereof. Many emerging markets struggle with weak institutions, fluctuating regulatory frameworks, and government instability. These are places where a law passed on Monday might be overhauled by Friday, where corruption is more than a headache, and where foreign companies often find themselves entangled in political or economic crises they couldn’t have predicted.
Let’s break down some of the unique challenges businesses face when entering these markets.
1. Weak Institutions
In many emerging markets, the institutions that businesses rely on—legal systems, regulatory bodies, financial institutions—are still developing. That means there’s often a lack of transparency, predictability, and enforcement when it comes to laws and regulations. One week, you might be following a particular set of rules, and the next, they’ve changed entirely or are being applied inconsistently.
For example, in some countries, property rights aren’t as secure as they are in developed economies. A business might invest millions in a new facility, only to find out that the government is expropriating land or changing property laws. And let’s not even get started on contract enforcement—what good is a business agreement if the local courts can’t (or won’t) enforce it?
The key here is to recognize that what works in developed markets doesn’t always apply in emerging ones. Businesses need to be prepared for ambiguity and develop strategies for operating in environments where the rules aren’t always clear or stable.
2. Political Instability
Instability is a hallmark of many emerging markets, where sudden changes in government—whether through elections, coups, or other forms of political upheaval—are more common than we’d like to admit. Political transitions can bring in new leaders with radically different economic or regulatory philosophies, throwing business strategies into chaos.
Take Thailand, for example, which has experienced a series of military coups over the past few decades. For businesses operating there, the frequent changes in leadership—and the accompanying shifts in economic policy—can make it difficult to plan long-term. One government might be pro-business and open to foreign investment, while the next could be nationalistic and protectionist, limiting access to markets and imposing heavy regulations on foreign companies.
This instability can also manifest in the form of civil unrest. Protests, strikes, or even violent clashes between government forces and opposition groups can disrupt supply chains, halt production, and make it impossible for businesses to operate safely.
3. Corruption and Governance Issues
Let’s not dance around it: corruption is a major issue in many emerging markets. Businesses operating in these regions often have to navigate corrupt officials, payoffs, and under-the-table dealings to get things done. While some companies turn a blind eye or adapt to this reality, engaging in corrupt practices opens the door to major legal and reputational risks, especially if they’re subject to international laws like the Foreign Corrupt Practices Act (FCPA) in the U.S. or the UK Bribery Act.
It’s a delicate balance. Corruption might be “how business is done” in some markets, but participating in it can lead to severe penalties, not to mention reputational damage that can follow a company for years. It’s not just about paying bribes, either. Navigating the bureaucratic red tape in some countries can be a slow, expensive process, with officials using their positions of power to extract favors or financial incentives.
4. Economic Volatility
Emerging markets are often more prone to economic instability, which is frequently tied to political developments. Currency fluctuations, inflation, and even full-blown economic crises can hit these markets seemingly out of nowhere. We saw this in Argentina, where a combination of political mismanagement and economic instability led to a currency crisis that decimated the country’s economy. Businesses that were heavily invested in Argentina suddenly found their revenues eroded as the peso lost value, making it nearly impossible to stay profitable.
Economic volatility is often linked to political decisions—government overspending, national debt crises, or poor monetary policy can lead to currency devaluation, runaway inflation, or capital flight. In extreme cases, businesses operating in these markets can find themselves trapped, unable to repatriate profits or deal in a stable currency.
5. Regulatory Uncertainty
One of the biggest headaches for businesses in emerging markets is the unpredictability of regulatory changes. Governments in these regions often revise policies in ways that can catch businesses off guard. Whether it’s a sudden tax hike, new import/export restrictions, or even nationalization of key industries, businesses can find themselves dealing with a whole new set of rules almost overnight.
For instance, Indonesia has periodically imposed strict regulations on foreign-owned businesses in the mining sector, mandating that companies transfer ownership to local partners or be subject to new taxes. These changes can disrupt operations and cause major financial losses, especially when they’re applied retroactively to existing investments.
The Bottom Line
Emerging markets are full of opportunity, but they’re also full of risk. Businesses that rush in without understanding the political landscape often pay the price, whether it’s through expropriated assets, regulatory roadblocks, or simply being unprepared for the volatility that comes with the territory.
But the risks can be managed. The companies that succeed in these regions don’t shy away from political risk—they plan for it. In the next section, we’ll explore how businesses can navigate these challenges through due diligence, local partnerships, and a whole lot of flexibility.
Strategies for Navigating Political Risk
If there’s one thing I’ve learned from watching businesses enter and exit emerging markets, it’s that success doesn’t come from avoiding political risk—it comes from managing it. Companies that thrive in these regions don’t wait for the perfect moment or a guarantee of political stability (spoiler alert: it’s never coming). Instead, they move in with a plan. They do their homework, build local relationships, and stay nimble enough to adapt when the inevitable happens.
So, how do we navigate the political minefield of emerging markets? Let’s break down some of the most effective strategies.
1. Due Diligence: Know What You’re Getting Into
Before stepping foot into a new market, especially one that’s politically volatile, the first step is deep, comprehensive research. You might think you know the market because of its size or growth potential, but political risk requires a different kind of investigation.
Political Landscape Analysis: Understand the history and structure of the government. Who holds the power? How stable is the regime? Are there upcoming elections that could shake things up? Dig into the country’s political history to see if there’s a pattern of regime changes, military coups, or sudden policy shifts. Pay attention to how governments have treated foreign businesses in the past—any history of nationalization or heavy-handed regulation should be a major red flag.
Local Experts: Work with political risk consultancies or local experts who have their ear to the ground. It’s one thing to read reports from international think tanks, but getting insights from people who are living and working in the market is invaluable. They’ll give you a real sense of how political events are likely to unfold and what risks are on the horizon.
Regulatory Environment: Examine how the country’s regulatory bodies operate. Are laws applied consistently, or are they subject to change depending on who’s in power? Understand the legal frameworks around property rights, labor laws, and business regulations. The more you know about how the government functions (or doesn’t), the better prepared you’ll be.
2. Local Partnerships: Don’t Go It Alone
When you’re operating in a politically volatile region, having local partners can be the difference between success and failure. Not only do they help you navigate the bureaucratic red tape, but they also provide valuable political protection and local credibility.
Strategic Alliances: Building partnerships with local businesses, suppliers, or even the government can help smooth over political risks. Local partners understand the political landscape better than anyone, and they often have the connections to navigate tricky situations—whether that’s dealing with a sudden regulatory change or appeasing local officials.
Community Engagement: It’s not just about partnering with other businesses—engaging with local communities is critical. Companies that are seen as invested in the local economy or committed to improving the welfare of the community are less likely to become political targets. For example, Coca-Cola’s success in Africa is due in part to its deep engagement with local communities, helping the company navigate politically volatile regions with relatively little disruption.
3. Flexible Operational Strategies: Semper Gumby
Here’s the reality: political risk means things will change, often suddenly. If your business isn’t flexible enough to adapt, you’ll be left scrambling. The key to surviving in politically volatile regions is maintaining operational flexibility—in other words, don’t put all your eggs in one basket.
Diversify Investments: Avoid over-investing in a single market. Yes, emerging markets can offer incredible growth potential, but if all your operations or investments are concentrated in one politically unstable country, you’re exposed. Diversify geographically—spread your investments across multiple markets so that if one goes south, your entire business isn’t at risk.
Flexible Supply Chains: Make sure your supply chain can adapt to disruptions. If a sudden policy change or civil unrest blocks your access to key materials or distribution networks, you need to have a plan for how to pivot. Companies like Nike and Apple, which faced challenges during the U.S.-China trade war, were able to shift parts of their production to countries like Vietnam and India to mitigate the impact of tariffs.
Scenario Planning: Prepare for a variety of political outcomes, and build contingency plans around each. What if a new government takes power and nationalizes your industry? What if currency controls are imposed? By anticipating different scenarios, you can act quickly rather than being caught off guard when the political winds shift.
4. Diversified Supply Chains: Avoid Single-Source Dependence
Supply chains are the backbone of any business, and in politically risky markets, they can become a point of vulnerability. If your entire supply chain is dependent on one region or one country, a single political event could halt operations. The solution? Diversify your supply chains across different geographies.
Spread Your Risk: If one country suddenly changes its trade policies or experiences political unrest, having alternative supply chains allows you to keep operating. For example, after facing tariffs from the U.S.-China trade war, many companies began shifting production to Southeast Asia. Having multiple supply routes helps reduce your dependence on any single country’s political stability.
Multiple Sourcing: Work with suppliers from different regions to ensure that if one supply route is disrupted, you can quickly pivot to another. Relying on a single source of materials or products in a politically volatile region leaves you vulnerable to sudden shifts in government policy or civil unrest.
5. Engagement with Government and Communities: Build a Safety Net
In politically volatile regions, building relationships with local governments and communities can serve as a protective barrier when things go wrong. The more engaged you are with the local economy, the harder it becomes for the government to take action against you without facing significant backlash.
Government Relations: Maintain an open dialogue with government officials at all levels. Companies that are seen as contributing to the local economy—through job creation, infrastructure development, or corporate social responsibility initiatives—often have more leverage when political shifts occur. If you’re viewed as essential to the country’s economic growth, governments may be less likely to target your business with harsh regulations or nationalization.
Corporate Social Responsibility (CSR): Show that your company is invested in the long-term well-being of the community. Businesses that engage in sustainable practices, invest in local education or healthcare, and promote economic development are more likely to gain public and political support, which can help buffer against political risks.
The Bottom Line
Navigating political risk in emerging markets is about being proactive, not reactive. The companies that succeed in these regions don’t just dive in and hope for the best—they do their homework, form strong local partnerships, and build flexibility into their operations. The key is to expect the unexpected and have a strategy in place to pivot when political risks inevitably arise.
Next, we’ll take a look at some real-world case studies—both successes and failures—that show how these strategies play out in practice.
Case Studies: Successes and Failures in Emerging Markets
Now that we’ve covered the strategies for navigating political risk in emerging markets, let’s see how these play out in the real world. There are plenty of stories—some of great success, others of painful failure—that show just how important it is to have the right approach when entering politically risky regions.
We’ll start with a few success stories—companies that not only survived the political challenges of emerging markets but thrived. Then, we’ll shift to the cautionary tales of businesses that misread the political landscape, underestimated the risks, or failed to adapt.
Success Story: Unilever in India
If you want an example of how to manage political risk in an emerging market, look no further than Unilever’s success in India. For decades, Unilever has been navigating the complex political and regulatory environment of India, where frequent changes in government and economic policy shifts can make even the best-laid business plans obsolete.
Unilever didn’t just enter the Indian market and hope for the best—they adapted their business model to fit local conditions and engaged deeply with local communities and government bodies. By doing so, they not only gained political protection but also a deep well of public goodwill that has helped them weather political storms.
Key Strategies for Success:
Local Partnerships: Unilever formed partnerships with Indian businesses and communities, ensuring they weren’t seen as an outsider exploiting local markets. This deep integration into the local economy made it harder for any government to target the company without facing significant backlash.
Product Localization: Unilever localized its products, adapting them to suit the preferences and needs of Indian consumers. This not only boosted sales but also ingrained the company deeper into Indian society, earning it a level of protection that multinational companies often lack.
Regulatory Engagement: By maintaining open channels of communication with regulatory bodies and the government, Unilever was able to anticipate and adapt to new regulations before they became problems. They invested heavily in corporate social responsibility (CSR) initiatives, such as improving sanitation and healthcare in rural areas, which further ingrained them in local communities.
Result:
Unilever has grown into one of the largest and most successful companies in India. Their ability to adapt to India’s political landscape, stay flexible, and engage deeply with local stakeholders allowed them to navigate regulatory changes, economic shifts, and political instability with minimal disruption.
Failure Story: Wal-Mart in India
While Unilever found success in India, Wal-Mart’s entry into the Indian market was a stark contrast. Wal-Mart, one of the world’s largest retailers, entered India with high expectations. But their rigid, Western-style business model didn’t fit the complex Indian regulatory environment, and they failed to engage with the local political landscape in a meaningful way.
Key Mistakes:
Misreading Regulatory Challenges: India’s retail sector is heavily regulated, especially when it comes to foreign direct investment (FDI). Wal-Mart underestimated how complex and politically sensitive this environment would be. India’s government placed heavy restrictions on foreign ownership of retail businesses, and Wal-Mart found itself entangled in bureaucratic red tape that it hadn’t anticipated.
Failure to Localize: Unlike Unilever, Wal-Mart didn’t adapt its business model to fit Indian culture and consumer behavior. Its attempt to implement its typical retail model, which worked in the U.S. and other markets, didn’t resonate with Indian consumers, who were used to shopping at small, local markets rather than large-scale retail chains.
Lack of Political Engagement: Wal-Mart didn’t build strong relationships with local government bodies or the political community, which left them vulnerable to regulatory hurdles. Their inability to navigate India’s political landscape slowed their growth and caused delays in expansion.
Result:
After years of slow progress and frustration, Wal-Mart finally managed to enter the Indian market more fully by purchasing a majority stake in Flipkart, a successful Indian e-commerce company. But it was an expensive and hard-fought lesson in why adapting to local political and cultural conditions is critical when entering an emerging market.
Success Story: Coca-Cola in Sub-Saharan Africa
Another example of a company that has navigated political risk with skill is Coca-Cola in sub-Saharan Africa. Africa has long been seen as a high-potential market, but political instability, corruption, and regulatory challenges have kept many companies at bay. Coca-Cola, however, managed to establish a strong foothold in the region by embedding itself deeply into local economies and communities.
Key Strategies for Success:
Local Bottling Partnerships: Coca-Cola worked with local bottlers, establishing joint ventures and partnerships that gave them a foothold in local economies. By decentralizing production and distribution, Coca-Cola reduced its exposure to political risk in any single country.
Community Engagement: Coca-Cola invested heavily in local communities, launching CSR programs aimed at improving access to clean water, healthcare, and education. These efforts helped the company gain public support and reduce its vulnerability to political shifts.
Government Relations: Coca-Cola developed strong relationships with local governments, positioning itself as a partner in economic development. This helped the company maintain stability even in politically volatile regions.
Result:
Coca-Cola has been incredibly successful in sub-Saharan Africa, maintaining its position as a market leader despite operating in one of the most politically unstable regions of the world. Their flexible approach, combined with strong local partnerships and government engagement, has allowed them to thrive where others have struggled.
Failure Story: Chevron in Ecuador
One of the more infamous cases of political risk gone wrong involves Chevron’s operations in Ecuador. In the 1960s and 1970s, Texaco (which was later acquired by Chevron) began oil exploration in the Ecuadorian Amazon. Over the next few decades, Chevron found itself in the middle of a legal and political battle that would become one of the largest environmental cases in history.
Key Mistakes:
Environmental Mismanagement: The root of Chevron’s troubles began with environmental mismanagement. Oil spills and environmental damage in the Amazon led to massive public outrage, and local communities began suing the company for damages. Chevron’s failure to manage the environmental impact of its operations set the stage for decades of legal battles.
Underestimating Political Risk: Chevron underestimated the political risks of operating in a country like Ecuador, where governments are prone to shifting alliances and public sentiment can quickly turn against foreign companies. As political pressure mounted and the legal cases dragged on, Chevron became a target of both the Ecuadorian government and international environmental groups.
Failure to Negotiate with the Government: Chevron fought the legal battle aggressively, refusing to negotiate with the Ecuadorian government or local communities. This approach backfired, as it only served to galvanize public opposition to the company and turn the case into a political issue.
Result:
After decades of legal battles, Chevron was ordered to pay billions in damages, although the case is still tied up in international courts. The company’s reputation suffered significantly, and its operations in Ecuador came to a halt. Chevron’s experience is a stark reminder of how environmental mismanagement and failure to engage with local stakeholders can turn political risk into a costly, long-term crisis.
The Takeaways
These case studies show that political risk isn’t a one-size-fits-all challenge. Some companies, like Unilever and Coca-Cola, have successfully managed the risks of emerging markets by adapting their strategies, engaging with local communities, and maintaining flexibility in their operations. Others, like Wal-Mart and Chevron, faced major setbacks due to misreading the political landscape or failing to adapt to local conditions.
The lesson is clear: businesses that thrive in politically risky environments are those that prepare, engage, and adapt.
Navigating Corruption and Governance Issues
Let’s talk about something that we can’t avoid when discussing emerging markets: corruption. It’s one of those realities that businesses operating in many politically unstable regions will face, and it’s a risk that needs to be managed carefully. Corruption might seem like “just the way things are done” in certain markets, but engaging with corrupt practices can lead to serious legal, financial, and reputational consequences. Even worse, it can drag your business into complex political and legal quagmires that are nearly impossible to escape.
Emerging markets often deal with governance issues that include weak rule of law, corrupt officials, and inefficient bureaucracies. For businesses, navigating this landscape requires not only savvy decision-making but also a strong commitment to ethical practices, because the consequences of corruption can stretch far beyond a quick bribe or an under-the-table deal.
The Reality of Corruption
In many emerging markets, corruption is a daily reality. From paying off local officials to speeding up permits or navigating customs hurdles, businesses are often tempted—or expected—to play along. But as tempting as it might be to engage in these practices, the risks far outweigh the benefits.
Legal Consequences: For companies subject to international laws like the Foreign Corrupt Practices Act (FCPA) in the U.S. or the UK Bribery Act, participating in corrupt activities can lead to massive fines, legal battles, and even criminal charges. Just ask Siemens, which faced one of the largest FCPA settlements in history—over $1.6 billion—after being caught bribing officials in multiple countries. The fallout from these kinds of scandals can derail businesses for years.
Reputational Damage: Beyond the legal implications, being linked to corruption can severely damage a company’s reputation. In an age where consumers, investors, and partners are more socially conscious than ever, businesses that are seen as unethical can face public backlash and loss of trust. This reputational damage can be even more costly than the fines or legal fees associated with corruption.
Getting Caught in Political Crossfire: Engaging in corrupt practices can also lead to getting dragged into political disputes. Governments change, and what was acceptable under one regime may become illegal under another. Businesses that get too comfortable playing along with corrupt officials often find themselves vulnerable when political winds shift. Suddenly, a new administration is investigating past deals, and what was once “business as usual” becomes a full-blown political scandal.
Best Practices for Navigating Corruption
So how do you manage political risk in regions where corruption is part of the landscape? The answer is carefully. Here are some strategies that can help businesses avoid the pitfalls of corruption while still operating effectively in emerging markets.
1. Zero-Tolerance Policies
It may seem impossible in some regions, but establishing and enforcing a zero-tolerance policy on corruption is critical. Companies need to make it clear to employees, partners, and local officials that bribery and other corrupt practices won’t be tolerated. This might mean moving more slowly through bureaucratic processes, but in the long run, avoiding corruption is far less costly than being caught in a scandal.
This also means training employees—especially those operating in high-risk regions—on anti-corruption laws and ethical business practices. Make sure that they understand the local legal frameworks and how to navigate tricky situations without compromising company standards.
2. Strong Internal Controls and Compliance Programs
For businesses operating in markets with high corruption risk, having robust internal controls is non-negotiable. This includes rigorous compliance programs that ensure your company is adhering to international anti-corruption laws, even if local practices are more lax.
Audits: Regular audits and financial oversight are essential in preventing corruption from taking hold within your organization. By keeping a close watch on financial flows, you can detect and stop improper payments or bribes before they escalate into a full-blown crisis.
Whistleblower Protections: Encourage a culture where employees feel comfortable reporting corrupt practices. Setting up anonymous reporting channels and protecting whistleblowers can help you uncover and address issues before they spiral out of control.
3. Choose Your Partners Wisely
The partnerships you form in emerging markets are critical—not just for success, but for staying clean. Local partners can help you navigate complex regulatory environments, but they can also be a source of corruption risk. Due diligence is crucial here. Make sure that any business or government partner you work with has a clean record and shares your commitment to ethical practices.
If your partners engage in corrupt activities, it doesn’t matter if you weren’t directly involved—the reputational and legal risks can still fall on your shoulders. Vet your partners thoroughly, and make sure they understand your zero-tolerance policy.
4. Engage with Local Governments Transparently
In many emerging markets, working with the government is inevitable. But rather than paying bribes or under-the-table fees, businesses should engage with local governments in a transparent and formal way. This could mean taking the time to build relationships through official channels, developing CSR programs that demonstrate your business’s commitment to the local economy, or contributing to community development initiatives.
Companies that are seen as transparent, ethical, and invested in the local community often earn the respect of both the government and the public, reducing the likelihood of being targeted for corrupt dealings. Coca-Cola, for example, has successfully navigated highly corrupt environments by engaging with governments and communities in a transparent and collaborative way, positioning themselves as a long-term partner in economic development.
The Bottom Line
Corruption is a difficult reality in many emerging markets, but businesses don’t have to get swept up in it. By sticking to a zero-tolerance policy, building strong internal compliance systems, choosing trustworthy partners, and engaging with governments transparently, companies can successfully navigate corruption risk without compromising their ethics—or breaking the law.
Next, we’ll dive into how businesses can balance the risks and rewards of operating in these high-potential, high-risk markets, and how to prepare for long-term success while managing political uncertainties.
Long-Term Thinking: Balancing Risk and Reward
Emerging markets offer businesses immense growth potential, but as we’ve already explored, they come with a lot of political baggage. So how do we balance the short-term risks against the long-term rewards? The companies that succeed in these environments don’t just dip their toes in and hope for the best—they take a long-term, strategic approach that allows them to survive the inevitable political bumps along the way.
Let’s dive into how businesses can manage this balancing act and what strategies can help them grow sustainably while navigating political uncertainty.
1. Weighing the Benefits vs. the Risks
The first step to managing political risk is understanding what’s at stake. It’s easy to get lured in by the promise of high growth rates and expanding consumer bases, but businesses need to be realistic about the risks they’re signing up for. The real challenge is figuring out if the long-term upside is worth the short-term volatility.
Questions to Consider:
What’s the political trajectory?: Is the country moving toward greater stability or deeper instability? Even if it’s volatile now, some countries may be in the early stages of reform, meaning the risk could decrease over time.
How exposed are we?: If the market suddenly collapses, will we lose everything, or do we have diversification in place? The answer to this will determine how much risk you’re really taking on.
How critical is the market to our overall strategy?: If it’s essential for growth, investing more heavily might make sense despite the risks. If it’s a nice-to-have market, you might want to proceed with more caution.
Examples of Strategic Risk Takers:
Companies like Nestlé and Coca-Cola operate in highly volatile regions because they know the long-term potential outweighs the short-term instability. They see value in embedding themselves in emerging markets, knowing that over the years, the benefits will outweigh the risks, as long as they remain flexible and adaptable.
In contrast, companies that rush in without properly assessing the risks—like Chevron in Ecuador—often find themselves paying a heavy price for ignoring the long-term challenges of operating in politically volatile regions.
2. Build in Flexibility: Expect the Unexpected
As we’ve discussed, the political situation in emerging markets can change on a dime. One day you’re looking at favorable trade agreements, and the next, you’re dealing with sudden tariffs, regime changes, or protests that shut down your supply chain.
To succeed in this environment, businesses need to stay nimble. Having a rigid business model that can’t adapt to changing political climates is a recipe for disaster.
What Flexibility Looks Like:
Modular Business Models: Companies that operate with flexible, modular business models can adjust more easily to political changes. This could mean having the ability to quickly relocate manufacturing, shift distribution, or change how products are sourced and delivered.
Scenario Planning: Prepare for multiple outcomes. What happens if a key government collapses? How do you react if a new regime comes to power? Being able to move quickly when the political landscape shifts is critical. The more scenarios you plan for, the less likely you are to be blindsided.
Regional Diversification: Avoid concentrating too much of your business in one country. Instead, spread your operations across multiple markets. For instance, many companies diversified out of China during the U.S.-China trade war, shifting production to Vietnam, India, or Mexico to hedge against political risk. A diversified presence across different countries and regions can help cushion the blow if one market experiences political upheaval.
3. Have an Exit Strategy
No one wants to think about worst-case scenarios when they’re entering a promising new market, but the reality is that sometimes things go wrong—and when they do, having an exit strategy can make all the difference between salvaging your business and taking a catastrophic loss.
When to Exit:
Political Environment Becomes Hostile: Sometimes, political instability or government policy can make it impossible to continue doing business. Nationalization, expropriation, or excessive regulation may push a company to consider exiting the market.
Reputational Risk: In some cases, continued operations in a politically unstable region can damage your brand’s global reputation. When the cost to your image outweighs the financial benefits of staying, it’s time to start planning your exit.
How to Exit:
Controlled Wind Down: Plan for a controlled exit where you can minimize losses. This could involve selling your local assets, moving production to other regions, or scaling down operations without fully abandoning the market. The goal is to protect your capital and reputation while leaving as gracefully as possible.
Contingency Funds: It’s always smart to keep a financial buffer in case you need to exit quickly. This ensures you can wind down operations or shift investments without draining your entire cash flow.
4. Sustainable Growth in Volatile Markets
While it’s tempting to enter an emerging market and pursue aggressive growth strategies, businesses that operate sustainably tend to fare better in the long run. What does sustainable growth look like in an emerging market? It means growing at a pace that accounts for political risks, instead of expanding recklessly and hoping that the political climate remains stable.
What Sustainable Growth Means:
Investing Incrementally: Don’t pour all your resources into a market from day one. Start small, test the waters, and invest more as you become more confident in the market’s political stability and economic potential.
Diversifying Revenue Streams: Don’t rely on one product or service. By diversifying your offerings, you reduce your dependence on a single revenue stream that could be disrupted by political changes.
Ethical Business Practices: Companies that prioritize corporate social responsibility (CSR) and ethical business practices tend to have more long-term success in politically unstable regions. Not only do these practices help build goodwill with local communities and governments, but they also shield businesses from reputational damage if the political situation worsens.
For example, Unilever’s success in India came not from rapid expansion, but from thoughtful, sustainable growth that focused on building strong relationships with local communities and adapting products to local markets. Unilever didn’t rush in with a one-size-fits-all strategy. Instead, they adapted to the market and scaled their operations sustainably over time, ensuring long-term success.
The Bottom Line
Balancing risk and reward in emerging markets is all about preparing for volatility, staying flexible, and maintaining long-term strategies. The short-term political risks may be intimidating, but the companies that take a thoughtful, measured approach to growth in these markets can unlock massive opportunities.
The key is to expect the unexpected—whether that’s political instability, regulatory changes, or shifts in consumer behavior—and be ready to adjust your operations accordingly. With a clear understanding of the risks, a flexible business model, and a well-thought-out exit strategy, businesses can thrive in even the most volatile regions.
In the final part of this series, we’ll explore how businesses can build a political risk-resilient organization, with strategies for embedding flexibility, preparedness, and resilience across all areas of the business.
Conclusion
Navigating political risk in emerging markets isn’t for the faint of heart, but the rewards can be enormous for those who get it right. As we’ve explored, these markets offer incredible growth potential, untapped resources, and rapidly expanding consumer bases. But with that potential comes political volatility, weak governance, corruption, and the ever-present possibility of regulatory upheaval.
The difference between businesses that thrive and those that falter in these markets often comes down to how well they prepare for the inevitable risks. Companies that rush into emerging markets without a clear understanding of the political landscape often find themselves overwhelmed by unexpected changes in government, regulation, or public sentiment. But those that take a long-term approach, build flexibility into their operations, and engage deeply with local communities can not only survive but thrive in even the most volatile environments.
Final Thoughts
Political risk is an unavoidable reality in emerging markets, but that doesn’t mean businesses have to shy away from these opportunities. As we’ve seen from the success stories of companies like Unilever and Coca-Cola, it’s possible to build a business that can weather the political storms of unstable regions. The key is preparation—understanding the political dynamics at play, building strong relationships with local stakeholders, and maintaining a flexible business model that can adapt to changing conditions.
At the same time, we can’t ignore the cautionary tales—businesses that underestimated political risk and paid the price. Whether it’s Wal-Mart struggling to break into India’s complex regulatory environment or Chevron getting bogged down in long-term political and legal battles in Ecuador, the lessons are clear: political risk can make or break a business.
The companies that succeed are the ones that balance the risks and rewards with careful planning, sustainable growth strategies, and the foresight to expect the unexpected. They invest in local relationships, build flexibility into their operations, and always have a contingency plan.
Looking Forward
In the next part of this series, we’ll focus on how businesses can build a political risk-resilient organization. While it’s impossible to eliminate political risk entirely, it is possible to embed resilience into the very fabric of your business—from your supply chains to your decision-making processes. We’ll explore practical strategies for ensuring that, no matter where you operate, your business is prepared to face political challenges head-on and come out stronger on the other side.
Stay tuned, because in a world where political risk is always lurking in the background, resilience is the name of the game.
Jonathan Prewitt