BRICs and Beyond: Lessons on Emerging Markets

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.

PART I

RISKS

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 the once almost-infallible government. The important factor of this rail crash was not just the rushed engineering work and lack of safety standards. Potentially a hurtling train can be seen as a metaphor for runaway development that is generating its share of collapsing buildings, lethal coal mines and bulldozed neighbourhoods. The main issues highlighted by the rail crash might be the growing need for scrutiny, accountability and public debate in a country with little experience of these practices. This rail crash has somehow shown the limits of dictatorship – can China go on killing people and getting away with it, especially now in a society with a much-increased level of media debate and recent outpouring of blogs and other internet-based messages? Some of China’s rulers probably know that these limits are being reached but, to judge by the news crackdown now under way, clearly not all of them appreciate the changes now happening in the politics and business relationship – or they do and are reacting in a frightened way.

Another example of a country where politics and business are usually inter-connected, and one of the most conservative countries in the world, is Saudi Arabia. Sometimes not regarded as an emerging market because of its high per capita incomes, Saudi is nevertheless emerging in terms of business independence and maturity – as the country is a clear case of the dominance of business by politics. The element of country risk is clearly on the rise here, especially since the Arab Spring revolts have increased in intensity and against the background of the major succession problem looming in the country. It is well-known that King Abdullah is nearly ninety and inevitably weak with age, whilst Crown Prince Sultan, expected to succeed him, is almost as old and in poor health. The next in line after him, Prince Nayef, the unpopular interior minister, is also elderly and suffers from diabetes. In order to control business and the local society, the government generously supports individual welfare and large local businesses like Saudi Aramco, and the money will not dry up if oil production continues – and can be manipulated by the number of barrels a day allowed by the government. Accounts of Saudi ladies driving cars – seen as a big-time protest – shows that changes are taking place in Saudi society and business. The gap between the elderly princes of the royal family and the increasingly worldly population is growing.

Whilst some countries, such as China and Saudi Arabia, are facing challenges to the dominance of the government in all aspects of daily life and political control may be decreasing, in other countries, we are seeing an active increase in an existing high degree of political intervention in business. In much of South America, companies (local and foreign) often cannot freely follow their commercial inclinations unless this suits the government. For example, in Argentina, a row between the government and a top steelmaker continues to brew. The company took legal action to overturn an emergency decree increasing state influence in the running of private companies, and the government hit back with a lawsuit arguing its prerogative to shape the corporate strategy of the steelmaker. Most Western companies take a high degree of autonomy in business for granted, so it can be challenging for the Western executive faced with this situation. Another example can be seen in government interference in Brazil. Business people are facing archaic and restrictive labour laws especially when companies are bought and sold. Organizations must have kept detailed payroll records, showing that they have completed all outstanding labour court cases and must promise to pay compensation if further cases are brought regarding matters that predate the sale, otherwise the purchaser of a company may experience huge unforeseen costs. In one example, an investor in a chain of pharmacies was taken to court by four former employees who had worked in the company years before. They claimed they were owed 500,000 reais (then $570,000) for overtime and holiday pay. Since the new owners lacked the payroll records, the labour court ruled against them and froze their bank accounts, forcing closure of their newly-acquired pharmacy stores and thirty-five redundancies. Basically, they suffered from Brazil’s tough labour laws, described in 900 articles, which are becoming tougher by the day.

What can happen to business when governments change? New regimes may come in, some ruling administrations become more paranoid, some governments can take a dislike to a successful business potentially encroaching on its territory, and even expropriation of private business can occur. The continuous mix of business and politics can experience ups and downs as governments fluctuate. Regime change has an awkward way of turning useful political contacts into liabilities. A business friend can suddenly be branded as a criminal. Rules can change unexpectedly, making it harder to do business, as Research in Motion, the maker of the BlackBerry, found when some governments demanded access to users’ messages. The authorities can enforce the law in the most draconian fashion against firms that displease them, as was the case for Russia’s Yukos, where executives found themselves in prison. Governments can also unexpectedly nationalize assets: in recent years, Congo has taken several mines from their private owners. Political risk can be seen as the biggest deterrent for investors in developing countries over the longer term, ranked ahead of economic instability and bad infrastructure.

With politics driving businesses in many BRICS and beyond, business decisions are inevitably impacted by political change. For example, when can prices rise? Only after the elections are over, as unpopular price rises can be bad for the incumbent political party. The impact of inflation can be negative. With the reduced government control of petrol prices in India, for example, prices were allowed to rise after a six-month subsidy in 2011, but only when the government felt secure enough to be unpopular.

Less democratic governments do not feel so much need to time potentially-unpopular changes with elections, and make sure that elections are not opportunities for expressions of discontent. Across emerging market countries, populations look to governments to provide security and point them in the right direction. Thus, the presence of security forces across Uganda during elections in February 2011 – including irregulars armed with cudgels – reduced chances of popular unrest. The new government of Uganda, trying to deflect potential discontent, emphasized new economic opportunities, especially with recent oil finds along the border with Congo and plans for regional economic integration. The oil fields could yield three billion barrels of crude oil and give Uganda energy independence, changing the balance of power with neighbouring strongman Kenya. The new leadership is trying to bring security to a country that remains rather unstable and is still suffering the consequences of the rule of Idi Amin, even though this was decades ago. The new leadership wants to be increasingly hands-on, and in this environment can get away with it.

So, political risk in a particular country and its impact on business need detailed assessment before an investment by an external party can proceed. When political dominance is on the wane, what is the impact on companies and business operators? When it’s on the increase, in what ways is this situation another problem? How about when political risk is fluctuating alarmingly and no-one can see the direction of the politics and business relationship? This can depend on levels of democracy and perceived political security on the part of the authorities. But many emerging market governments continue to exhibit levels of paranoia, which can be a new experience for the Western business person looking to make inroads into developing countries.

2. The jittery political environment in China – political risk, continued

China’s concern with preventing political upheavals has led to a vast increase in security-related activity, which has inevitably impacted on business and even on ordinary people going about their ordinary daily activities, including foreigners. Such is the paranoia of the authorities that a high degree of nervousness is apparent, and communications difficulties have increased (see also Censorship and information risk, below). There is still significant loyalty to the old order, with many locals clearly worrying about getting into trouble and trying hard to keep to business as usual. Although in China there has been no sign of an Arab Spring-type movement, observers across the country see the government as going to great lengths to make sure everything looks calm. Thus, Western business people developing their operations in China now must be particularly careful not to draw attention to themselves and risk upsetting the over-sensitive authorities.

Business visitors to China have noticed the huge security operations in Beijing, Shanghai and other cities, especially after internet messages encouraging silent walk-pasts on certain days – these are not demonstrations as such, but as much as some Chinese feel they can do to make protests. Very few locals respond to these requests, as they can attract unwelcome police attention – and often it can be difficult to work out who the police are: they are everywhere.

Various observers and media have been documenting the impact of the increase in government surveillance in China, discussing how police have regularly pounced on handfuls of locals who looked inclined to take part in the silent walk-past protests and whisked them away. Dissidents have been detained or are watched even more closely, and an American journalist was beaten and kicked by plain-clothed goons and detained for several hours. The country’s annual budget includes eye-catching numbers for security reflecting double-digit growth, with 624 billion yuan ($95 billion) spent on law and order, 13.8% more than in 2010. Central areas of several Chinese cities have been saturated with uniformed and plain-clothed officers. They have staked out shopping streets where the internet messages have urged protestors to ‘stroll’ (a euphemism often used in China for demonstrating, which the police hardly ever permit). These protests have yet to materialize, but the authorities have decided to rescind their 2007 decision to give foreign correspondents freer rein. Many foreign business people have been suspected of being undercover journalists and are being warned to keep a low profile.

A new tactic of the Chinese authorities concerns Gmail, now more frustrating to use than ever; but the Chinese have been careful not to cut off access altogether. Google have claimed that China was again interfering with its service in the country, cleverly making it look as if the problem lies with Gmail itself. A foreign businessman reflected that ‘it does make you feel much more that there is a cost of being here’.

The background to this crackdown is the feeling that most Chinese are still loyal to the memory of traditional communism and Mao Zedong, shown in a petition with the names of nearly 10,000 people accusing a liberal intellectual of slandering Mao Zedong and attempting to overthrow the Communist Party. Diehard Maoists are continuing to defend the emerging markets themselves and confront their critics, which may be seen as a symptom of an escalation of ideological struggles between China’s West-leaning