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Chapter 1
Introduction
Doing Business in Emerging Markets – Risks, Opportunities and Practice
The acronym BRICs – Brazil, Russia, India and China – was one of the most well-known buzz words of the first decade of the twenty-first century, and seems all set to continue into the next. Now, in 2012, the concept has gained add-ons – first of all the ‘s’ has grown from a mere plural into inclusion of another country – South Africa – and the use of ‘beyond’ suggests that there are even more countries on the threshold of becoming BRICS. The N-11 – a raft of countries waiting in the wings – is also widely discussed as offering economic growth prospects worthy of consideration by investors and business people worldwide (glossary items are shown in bold – see Glossary for definitions).
Yet, this observation alone is not necessarily enough to justify another book on one of the hottest topics of the decade. There is a vast literature and wealth of internet-based sources on the financial and economic development and future prospects of these countries and the emerging market multinationals becoming established there. There is a multitude of academic analyses of the evolution of these markets, with detailed enquiries into trends, including how the Emerging Market Index often outstrips the performance of companies in developed countries, including the G7 itself. Many consulting firms produce booklets with useful regulatory information, facts and figures and tips and hints about operating in specific locations. But relatively few texts profess to provide the kind of up-to-the-minute blow-by-blow insights available from such on-the-ball media as The Economist and the Financial Times. These sources provide daily and weekly updates but tend to be thrown way and almost forgotten in the rapid pace of business life, and, as newspapers, sometimes get overtaken by events.
BRICS and Beyond: Risks and Opportunities for Western Business in Emerging Markets aims to distil many months of reading all the latest news from daily and weekly emerging markets reports, alongside a wealth of hitherto mostly tacit knowledge gained from living and working in the BRICS and beyond for nearly thirty years. After being a journalist, consultant, trainer and teacher in India, many Asian countries including China, the Middle East, Africa, the former Soviet Union countries and South America, I felt that many books and guides to doing business in emerging markets included material that seemed rather obvious or was fairly superficial – or they were so academic that practitioner-oriented readers would find them interesting but not immediately useful.
Now, as an MBA teacher, my students, who are mostly learning part-time whilst working, want real insights into the issues involved in dealing with these countries – from the point of view of developed countries doing business with the BRICS and beyond, and these countries doing deals with each other. They are also looking for material that relates to specific courses within their MBA studies – such as Country Risk in International Business, Corporate Governance and CSR, Cross-Cultural Management, Marketing, Entrepreneurship, Strategy and so on. This book has been written with them in mind, as practical business leaders looking to be savvy about risks as well as well-informed about opportunities, and to gain insights from fellow practitioners who have been there before.
This might be another differentiator – I have tried to steer a middle course between doom-saying cynicism about business prospects in the BRICS and beyond and overly-naive optimism about making millions overnight. Most practitioners have no illusions that they could lose their shirts – and many have already – yet they press on. Meanwhile the optimism and excitement about the ‘two billion armpits’ represented by the opening-up of the China market has given way to more rational calculations of prospects and more sober risk analysis.
Thus, the chapters in this book are grouped into three parts – Risks, Opportunities and Practice. Chapter 2, Country Risk, focuses on one of the greatest challenges for external investors and foreign business people, that of the powerful involvement of governments in most of the BRICS and beyond. This can be particularly arbitrary and unpredictable – or at least it often seems that way to outsiders. Chapter 3, Corporate Social Responsibility, looks at ethics, transparency and governance in emerging markets – which can present a completely new and worrying experience for those with limited experience of the developing world. Business Culture, Chapter 4, considers the challenges of cross-cultural management and of managing people in emerging markets. Culturally-oriented behaviours are hard to generalize, but there are some useful guidelines to follow and assumptions to avoid. The globalization of products and services are making the world a smaller place, but perhaps it’s an appreciation of the differences rather than the similarities that counts.
In case these chapters tend to suggest that doing business in the BRICS and beyond is more trouble than it’s worth – the opportunities are unavoidably attractive for those willing to think in quite a different way. Chapter 5, Marketing, looks at the possibility of implementing new marketing ideas both inbound and outbound from emerging markets – both sides can learn from each other, especially as developing economies now account for more than half of global consumption, and many developed countries are deep in financial recession. Chapter 6, Entrepreneurship and Innovation, reviews technology and new business ventures in emerging markets and suggests that the developed world no longer monopolizes the source of new business ideas – if it ever did. Again, this is another learning opportunity for those willing to put aside old prejudices.
Finally, the third part of the book focuses on the experiences in practice of companies from the BRICS and beyond – and the businesses seeking to work with them. These are discussed in terms of Strategy and Operations (Chapter 7) and Strategic Alliances (Chapter 8). Many of the decisions made on both sides defy explanation, but they all contribute to the conclusions, overall insights and pointers to the future in the last chapter, Lessons for Global Business.
Each chapter is divided into different sections, each of which provides practical material for the international business person that can also be used as separate case studies for MBA students. Lessons at the end of each chapter are followed by Workshop Activities and Worked Examples, corresponding to each of the sections. Business people in the field will be able to add their own ‘war stories’, many of which smack of Lonely Planet-type experiences.
Working in the BRICS and beyond has given the world a new vocabulary, much of which is introduced in the Glossary section. What if you hear that the world’s new anchor economy’s chameleon-like and anonymous companies are leading the world in disruptive innovation despite institutional voids, whilst its biggest rival creatively adapts reverse innovation to springboard into multi-polar vertical integration? And what if you are accused of corporate imperialism, yet warned against cannibalizing your cash cow whilst you are reconnoitring for adversaries? This terminology needs to be cracked, if only to keep up with boardroom and AGM conversations, if not on the golf course and in the club bar – to say nothing of during the long-haul flight and on the ground in the BRICS and beyond.
Finally, many books on this subject of developing economies and emerging markets spend numerous pages struggling with a definition of which countries they are talking about, and which countries should or should not be included. This book prefers to keep it simple, taking from The Economist an inclusive rather than exclusive definition, based on what the BRICS and beyond are not. The Economist’s definition of developed economies based on 1990 data includes Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States. The BRICS and beyond are, basically, every other country – it may be just a matter of time before their business prospects emerge.
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PART I
RISKS
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Chapter 2
Country Risk
Politics and Business in Emerging Markets
Introduction
‘Country risk’ can be seen as a catch-all concept, which is a primary consideration for all Western executives expanding their businesses into emerging markets. Political risk, financial risk, commodity risk and risks associated with violence and conflict – as well as risks of kidnapping and piracy – must be weighed in the balance against potential profits. Demographic pressures on society, censorship and other ways of controlling information may present risks unanticipated by Western business people, and there are many more risks to be discovered as business opportunities are investigated in more detail and go further down the track.
One of the greatest country risks faced by Western business executives trying to penetrate emerging markets is the tendency towards a much closer relationship between government and business. There may be no Western-style separation between ‘church and state’ in the country they are targeting. The high level of state involvement in companies can produce what Western business might see as unwelcome regulation and government intervention. The first section, ‘Church and state - the impact of politics on business’, considers these issues, and the second section, ‘The jittery political environment in China – political risk, continued’, focuses on the manifestations of Chinese attitudes to political risk and how these make things more difficult for Western businesses operating in China’s challenging political situation. China, the greatest and largest of the BRICS, is already seen as an anchor economy in the world. As discussed in the third section, in Communist and post-Communist countries, there can be a special form of political risk impacting business, hence the subheading ‘Once a Communist . . . another form of political risk’, which can be particularly relevant for Westerners doing business in this environment, especially due to the lack of Western-style organizations facilitating business, or institutional voids.
The fourth section looks at the ways in which ‘Some countries are (financially) riskier than others’. Financial risks can include high levels of inflation, weak financial management and poor governance practices (another institutional void), banking failure, local government insolvency, a great disparity between rich and poor (including the accumulation of wealth by authoritarian leaders), arbitrary taxation demands and low purchasing power, especially at the bottom of the pyramid. These issues are not just impacting emerging markets. They are often present in low-income countries but can – of course – affect developed countries too, especially in periods of economic downturn.
‘The haves and the have-nots – commodity risk’ is the subject of the fifth section. Some countries can be seen as riskier than others when they lack essential commodities and must have these at all costs. The sixth section, ‘War and peace’, looks at the risks associated with countries that are currently at war, have recently experienced war and its resulting dislocation, and may be suffering from the rapaciousness of dictators – or are in the throes of continuous conflict most of the time. The section on ‘Kidnapping and piracy’ considers an age-old risk now on the increase, and the impact on operating costs – especially for Western shipping in shipping lanes in the Middle East and off Africa.
The eighth section, ‘Demographic risk’, considers population changes, which are making their mark in adding to business risk, especially in terms of the aging society in the more established and high-population BRICS, such as China. The emphasis on the preference for male babies and the continuation of the one-child family policy produces more and different demographic risks, as does the internal passport system. The ninth section, ‘Discretion can be the better part of valour – censorship risk’, is of increasing concern, in Africa, Turkey and especially in China, and is described in more detail in section ten, ‘Information and transparency in China’. Many businesses in China operate almost anonymously in terms of rarely publishing operational details and the low market profile of their brand.
India has particular country risks associated with its politics, economy, society and way of doing business, well-known to locals and potentially causing calamity for foreign investors, who face high barriers to entry. So some Indian businesses look overseas, for such reasons as described in the penultimate section, ‘The grass is always greener – Indian business avoids its risky home market’. Finally, the last section considers slightly less common and more specific risks associated with certain countries and businesses. ‘More country risks. . .’ includes the issues of the pariah status of countries under sanctions; tit-for-tat risks of politics interfering with business in terms of inter-country relations; ‘tarred with the same brush’ risks; the fact that some countries are not as ‘independent’ as they seem; protectionism, also discussed in our CSR and Business Ethics chapter; and high unemployment and a tendency towards dumping – which all add to the picture of the extremely risky nature of doing business in emerging markets.
1. ‘Church and state’ – the impact of politics on business
In emerging market countries generally there tends to be a rather conservative approach to economic development and a perceived need for stability in business – and also a tendency to look to governments to intervene and (hopefully) create more stability. Many companies in these countries are familiar with controlling and hands-on governments, so this must be taken into account by Western executives in their negotiations. The populations in many of these countries tend to be more high power distant (see Chapter 4) and tolerant of authoritarian rule. Overall, many emerging markets still tend to be immature in coping with the free movement of market forces as they are unused to the concept of ‘the separation of church and state’. When the government looks weak, this can make consumers and businesses nervous.
China has one of the most powerful governments in the world, and when the government fails to offer leadership and direction, strange things can happen, in terms of public and business reactions. For example, early April 2011 saw a rare case of consumers panic buying commodities in China, possibly reflecting an increasing collapse of trust in officialdom – illustrated by a nationwide stampede to buy and stockpile cooking salt. Apparently, the word was spread among Chinese shoppers that iodine in the salt could help prevent sickness from radiation, at a time when people were worrying that radiation was spreading from the stricken Fukushima nuclear-power plant in Japan to China. The Chinese consumers worried that this leak of radiation might contaminate the seawater off China and taint local salt production. So, on one day alone, 4,000 tonnes of salt were sold in the city of Zhejiang, eight times the normal amount purchased. Salt prices are normally controlled by the government and prices are fixed; however, the salt merchants, noticing the massive consumer interest, marked them up, but consumers kept on buying. An online commentary argued that the reason people were engaging in pack buying was that they did not trust the government.
The level of consumer trust in the government in China is usually high and, therefore, panic erupts when confidence is dented. The well-publicized Wenzhou rail crash of August 2011 has important implications for changes in the perception of political risk in China – and a decline in trust of...
