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U.S. Companies to Increase Investment Across Broader Range of Emerging Markets, Study Finds

U.S. business executives involved with business development and corporate strategy expect their companies will invest in geographic expansion, particularly in high-growth and emerging markets, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm.

In the KPMG High Growth Markets Outlook Survey, 69 percent of the respondents identified geographic expansion as the top area for increased spending over the next year, with the majority focused on expanding into or among high-growth and emerging markets outside of the United States. When asked about the new markets in which their companies planned to make capital investments of more than $5m over the next year, Brazil (27 percent), China (26 percent), Mexico (17 percent), and India (13 percent) were the most popular destinations.

"U.S. businesses are seeing positive momentum in the domestic economy and now appear ready to loosen their purse strings to invest in emerging and high-growth markets to fuel growth in years to come," said Mark Barnes, national leader of KPMG's U.S. High Growth Markets practice. "Not surprisingly, these businesses are honing in on vast markets with strong growth rates.

"We also see some investment moving outside of the BRICs and into other markets such as the Philippines, Turkey, South Africa, Korea, Indonesia, Vietnam and Colombia, which possess natural resources, a hunger for goods and services such as healthcare and financial services, and a need for vital infrastructure," added Barnes. "While some of these countries may not generate immediate returns, they have bright, long-term growth prospects and companies that establish an early presence can gain a competitive advantage."
Joint ventures (37 percent) and mergers and acquisitions (22 percent) were cited most frequently as the types of investments companies plan to make when entering into new emerging and high-growth markets over the next year.
"Choosing the right joint venture partner and conducting detailed due diligence on an M&A target when entering into a new market is critical," said Barnes. "Additionally, the management model must be carefully considered because companies often cannot find local talent and don't have a grasp on how business gets done in these markets to succeed on their own.

"We're seeing many smaller businesses on the retail side create alliances or other types of partnerships to get their products to market without direct investment in these countries," added Barnes.

Revenue Growth in High-Growth and Emerging Markets

Seventy-seven percent of respondents said they expect their company's revenue in high-growth and emerging markets to increase over the next year, while 22 percent expect it to remain the same and one percent expects it to decline.

When asked the percentage of their companies' global revenue that they anticipate coming from high-growth and emerging market countries over the next year, 37 percent said 1-10 percent, 30 percent said 11-20 percent, and 14 percent said 21-30 percent.

"While many companies anticipate revenue growth in emerging and high-growth markets, we've seen plenty of companies – especially smaller companies -- struggle to succeed, usually because they didn't conduct the necessary due diligence or identify the right business partners," said Barnes. "Companies need to enter into these markets with their eyes wide open and a deep sense of cultural understanding of how business gets done because these markets are highly entrepreneurial and competitive."

Consumer market growth (64 percent), tax incentives (26 percent), and government initiatives (23 percent) were selected as the top revenue growth drivers in high-growth and emerging markets over the next year.

Middle class growth (59 percent) and rapid urbanization (31 percent) were cited as the main factors driving consumer growth in high-growth and emerging markets.

Growth Barriers

Lack of local talent or human resources (38 percent), slowing GDP growth (38 percent), inflation (29 percent), rising wages (28 percent), and local competitive activities (22 percent) were identified as the biggest barriers to revenue growth in high-growth and emerging markets over the next year.

The role of government and bureaucracy (50 percent), political risk (42 percent), securing and retaining talent (33 percent), bribery and corruption (30 percent), and regulatory issues (27 percent) were cited by respondents as the biggest operational challenges for their companies in high-growth and emerging markets.

"Various growth challenges such as rising labor costs and operational challenges are precipitating investments into new high-growth and emerging markets," said Barnes. "But many of these challenges are not insurmountable and can be overcome with the right know-how and counsel."

The KPMG survey was conducted in the spring of 2013 and reflects the responses of 100 U.S. business executives involved with business development and corporate strategy. Based on revenue in the most recent fiscal year, 20 percent of respondents work for companies with annual revenues exceeding $10bn, 29 percent with annual revenues in the $1bn to $10bn range, and 51 percent with revenues in the $100m to $1bn range. Half of the respondents' companies have current operations in high-growth and emerging markets, while half did not but are planning to invest.

Source: KPMG

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