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Subject: Risk Management in Emerging Markets
An emerging market refers to a country that has a market with traits of developing but still lacks the standards that will qualify it to be seen as an established market. Emerging market refers to an economy that is showing progress towards advancing in terms of growth and industrialization. As much as there are high expectations in terms of investment returns from these markets, there is a high risk accompanying it. These are markets that are experiencing difficulties penetrating the global markets. For an organization that is expanding, there are plenty of opportunities in these markets, but the challenges and risks have to be dealt with. The returns from these markets are worth investing in, and so it's the effort of an organization to look for ways of mitigating these risks.
Some of the risks to deal with are; foreign exchange rate risk. Currency fluctuations will be of significant impact to the organization. An organization whose margins are low will be profoundly affected by a currency shift, and these emerging markets are always vulnerable to currency depreciation and appreciations. An organization investing in emerging market will also face political risks, and in these cases, there will be cases of wars, change of market policies and difficulties in controlling inflation. All of this can lead to the shutdown of industries. We also have the risk of bankruptcy, lack of transparency, corruption and inferior technology.
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An organization that has an interest in these markets will have to alter its risk management framework to cope up with these challenges. Some of these alterations include; diversifying its market, an organization can expand across multiple markets because the occurrence of one risk in one nation can be devastating, but when investment is made in different countries, this one risk can’t jeopardize the operations of the organization (Rottig, 2016). Diversifying investments will give the organization a leverage ground when handling each market individually. A nation will likely accommodate foreign investments upon realizing that the organization's withdrawal is legitimate. Such diversification will enable an organization to protect itself against financial losses as a result of currency fluctuations which is typical in most emerging markets (Marquis & Raynad, 2015). When investing in emerging markets, the organization must improve its transparency. This is because most governments in emerging markets do not emphasize much on this as part of their corporate governance. It's the organization to seek their remedies. This can be achieved through education programs to all stakeholders and close monitoring of internal controls since in emerging nations there is a likelihood of falsehood and fraud related cases and so stringent measures and governance guidelines will help reduce risks of corruption.
The COSO framework which was designed by to curb corporate fraud through integrated guidance on internal controls needs to be improved to mitigate these risks in emerging markets. The COSO framework should improve on information and communication and their risk assessment strategy (Moeller, 2007). They are a bit hazy on these particular areas. Many audits get out of hand based on these loopholes. The framework is supposed to give clear guidelines that do not have technical flaws, for example, risk management should not only be viewed on the probability of occurrence and their impact but also on what happens when the risks are low, medium or high. The COSO framework needs improving and some of its components scrapped off. For example, the Evaluation tool should be discarded because the matrices used in it has a lot of flaws; there is no differentiating between processing data for business and financial reporting.
In conclusion, it's clear that emerging markets offer higher returns compared to developed ones and so the organization should invest here despite the risks that come with them. It's the initiative of an organization to find ways of mitigating these risks.
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References
Marquis, C, Raynard, M (2015) - Institutional strategies in emerging markets- Institutions and emerging markets: effects and implications for multinational corporations -The Academy of Management Annals - Taylor & Francis
Rottig, D (2016) - International Journal of Emerging Markets, 2016 - emeraldinsight.com
Moeller, RR (2007) -COSO enterprise risk management: understanding the new integrated ERM framework- books.google.com
