Multinational corporations are aware of the many growth opportunities made available by expansion into the global market:
- Access to a greater number of consumers
- Access to a larger labor market and lower labor costs
- Potentially less corporate regulation
- Potentially lower corporate taxes
Furthering investments in emerging markets can create additional growth; however, investments in emerging markets also come with additional risks that must be evaluated and addressed. The use of logistics parks as ideal for de-risking emerging markets for multinational corporations is one innovative solution to mitigate risk in emerging markets and gain rewards from investment.
Risks for multinational corporations in emerging markets
Investing in emerging markets offers further opportunities for growth but has increased risks.
Advantages of investing in emerging markets
In recent years, economies in the Middle East, Africa, and Asia have been growing much faster than those of the United States, European and other Western nations. According to Ameriprise Financial, from 1969 to 2019 the US GDP increased by a factor of only 3.8 in comparison to India’s 14.1.
- Emerging markets often emerging affluent and middle classes with additional buying power and an interest in luxury goods. This provides an opportunity to introduce new products into the market. Being one of the first to offer a product allows a company to acquire a significant market share.
- Emerging markets are likely to have a growing infrastructure system. As infrastructure is built in these communities, businesses enter the market to provide services. Being one of the early businesses fosters the creation of lasting relationships with customers.
Investing in emerging markets also offers access to less costly labor and raw materials and helps diversify a company’s portfolio to balance economic downturns in one region with growth in another.
Political, economic, and currency risk
Emerging markets offer unique opportunities for growth. However, there are a number of risks associated with emerging markets. These risks pose potential problems for a multinational corporation’s global expansion strategy and may deter a company from investing.
Though investors in emerging markets have seen evidence of a favorable risk-to-reward ratio in their investments, it is imperative to consider potential risks when making investments in these markets.
Political risk
Political risks of emerging markets are major contributors to hesitancy toward investing in emerging markets. According to a 2006 Economist report, 65 percent of respondents have had to cancel plans to invest in emerging markets due to political risks.
These risks are created by unstable governments or political unrest and have consequences for the economy. Two of the most highly noted risks are corruption and instability of the political regime. An unstable government is at risk of being replaced, which can lead to significant policy changes affecting the economy. A regime change in an emerging market could be hostile to foreign interference, making multinational business particularly difficult.
According to an article by S&P Dow Jones Indices, political instability in Brazil in 2014 caused a drop in Brazilian equities. The underlying causes of this were uncertainty of the incumbent administraton’s stability and shortcomings of an economic policy called the New Economic Matrix. Another example cited by the same article is a drop in equities in Russia in 2014 caused by several risk factors. These are examples of political risks that must be taken into account when investing in emerging markets.
Economic and currency risks
Economic risks also play a significant role in deciding whether to invest in emerging markets. These risks come in the form of insufficient labor and materials, high inflation or deflation, and unregulated markets. The instability creates challenges for investors.
Currency risk relates to valuation of currency. Emerging markets’ currencies can be much more volatile than those of established markets. Investment gains can drop if the local currency drops significantly in value.
Despite this, multinational companies venturing into these markets have been able to see growth. They continue to invest in these markets, proving that it is possible to mitigate these risks.
Finding innovative approaches to alleviate risks can contribute to increased growth when making investments in emerging markets.
Innovations in emerging markets that attract multinational corporations
A logistics park is a defined industrial area that is home to warehousing and other logistics and distribution activities. Logistics parks offer real estate and services to help streamline supply chain management for multinational companies venturing into global markets. These parks help reduce the risk associated with entering an emerging market.
Research and development
One area of promising activity in in emerging markets is research and development (R & D). Performing R & D work in emerging markets with pools of talented, skilled workers is beneficial because of the reduced costs associated with labor and laboratories, and the innovations that come out those laboratories.
Emerging markets allow companies to have state-of-the-art facilities that are not as easily or affordably built in established markets. This reduces cost in real estate and labor while improving the quality of the laboratories.
R & D facilities in emerging markets also give companies access to the best talent from top universities around the globe, some of which are in emerging markets. In 2021 Brazil and China alone were home to over fifty of the top 500 universities in the world, as ranked by U.S. News.
These well-educated graduates are recruited to work in R & D to develop innovative solutions and technologies. According to Reuters, in 2019 and 2020, China surpassed the United States in the number of patent applications. China’s rate of increase was also higher from 2019 to 2020, at 16.1 percent versus the United States’ 3 percent.
Innovation, as displayed by the growth in patents throughout the COVID-19 pandemic, remains resilient and crucial during times of crisis. This resiliency is another reason investing in R & D in emerging markets can be beneficial to multinational corporations.
Direct investment
Emerging markets, investors, and multinational corporations alike can benefit from direct investment. Foreign direct investment (FDI) occurs when a company domiciled in one country establishes lasting interest, through investment, in an entity that resides another country. This normally involves an ownership threshold of 10 percent or higher. FDI stimulates economic growth by building stable links between economies and promoting international trade.
Increased employment:
Investments in the economies of emerging markets create jobs and increase employment.
Human resource development:
FDI often promotes a stronger workforce, providing training and development to increase the skills and knowledge of employees. This creates a ripple effect in the economy.
Industrial development:
Creation of industrial centers in underdeveloped parts of a country can boost the social economy by providing jobs, building infrastructure, and bringing formerly unavailable resources to the area.
Provision of finance and technology:
FDI often allows emerging markets to gain access to financial and technological innovations that were formerly unavailable.
Increased exports
Many goods produced through FDI are intended for international consumption.
How logistics parks can assist multinational corporations with distribution and compliance in emerging markets
The benefits of investing internationally are abundantly clear, and those of investing in an emerging market can be exponentially greater. However, the risks of those markets need to be addressed. Logistics parks offer a solution for multinational corporations so that risk in the supply chain is minimized. They:
- Lower the cost of market entry for multinationals
- Preserve working capital for multinationals’ expansion and operations
- Allow multinationals to enter markets quickly — without the hassle of buying and securing title to property
- Let multinationals scale and flex operations without having to undertake construction themselves
- Help multinationals concentrate on their core strengths while leaving security, maintenance, waste management, utilities and other functions to a logistics park operator
This is why logistics parks are ideal for de-risking emerging markets for multinational corporations.
Supporting distribution through location
Logistics parks are located in transportation hubs of major cities in emerging markets. They are near urban centers, road networks, seaports, international airports, rail lines, and other national hubs. This provides quick access to domestic and international transportation and export facilities.
Logistics parks are dedicated to supply chain support. They are designed specifically for warehousing and light industrial activities so that companies can handle warehousing and distribution from a centralized location. This facilitates clustering equipment and services for shipping and allows consolidation of trucks or shipments required.
There are many direct benefits of the strategic locations of logistics parks:
- The requirements of demand and supply are met on time.
- Large amounts of space are available, with state-of-the-art storage facilities for goods and products.
- Wide roads enable free-flowing traffic at all hours of the day and night.
- The sites are highly secure.
- Site management and maintenance, including services like landscaping and waste removal, are provided.
- Ample truck and office parking space is available.
- Space for amenities like banking, insurance, office space, catering, and other services is available.
Supporting local economies
In addition to the direct benefits, there are economic and environmental benefits that contribute to the future success of the emerging markets logistics parks are located in. In the long term, this will pay off for the multinational companies investing in these markets and doing business out of these logistics parks.
Having a consolidated location where multinational corporations are storing and distributing goods as well as using the space for other business needs draws local companies to the area. The convenience of logistics parks allows local construction and transportation companies to operate at lower costs. Jobs are created in the logistics park itself, both with multinational companies and with local companies that have been drawn to provide services for the park and its businesses.
All of this generates economic growth in the market and benefits the surrounding community. In some cases this even creates social benefits by improving infrastructure and education.
Supporting distribution and compliance through innovation
Containing the storage and distribution of goods within a logistics park can be considered an innovation in itself. However, the dedication of logistics parks to improving distribution has also allowed the introduction of technologies that support the goal of streamlining the supply chain.
Many automated technologies have been designed and implemented to improve logistics in the supply chain. Advanced robotics and artificial intelligence technologies have allowed for the creation of reliable and efficient solutions for warehouses, factories, and supply chain management. Technology companies are continuing to improve these solutions.
Logistics parks are in a unique position to take advantage of these automation solutions for all parties involved in the logistics process. This further increases the efficiencies embedded into the functions of the logistics park.
Supporting compliance
Logistics parks can also offer support with compliance. When entering the global market, multinational companies must be compliant with the laws and regulations of the foreign countries in which they are doing business. Not only does operating out of a single facility make it easier to manage these regulations, but many logistics parks also offer services to assist with these compliance issues.
Strategies that fit logistics parks in emerging markets
Globalization has made international trade increasingly more streamlined. Supply chain consolidation in the form of logistics parks and technological advances in logistics management are two innovations that have already been touched on. However, innovations in e-commerce have further propelled globalization and can make investing in emerging markets increasingly rewarding.
E-commerce
The innovations of technology and e-commerce have made it possible to handle logistics virtually and for consumers to purchase products online from around the world. The COVID-19 pandemic accelerated the shift to online purchasing, with global retail e-commerce sales increasing 27.6 percent, according to Oracle NetSuite. The same report estimates that by 2023, e-commerce will account for 22 percent of all global retail sales.
Logistics parks can help with this rapid transition to online sales with the built-in efficiencies and ability to take advantage of innovative automation and virtual logistics technologies.
De-risk with logistics parks
Experts see logistics parks as ideal for de-risking emerging markets for multinational corporations because they reduce costs, increase efficiencies, and contribute to global infrastructure.
Contact Agility to learn how Agility Logistics Parks in Africa, South Asia, and the Middle East can help your company with a logistics infrastructure that meets or bests international standards.
Contact Agility to learn how Agility Logistics Parks in Africa, South Asia, and the Middle East can help your company with a logistics infrastructure that meets or bests international standards.
