BRICs and Beyond E-Book

Stephanie Jones

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 438

Veröffentlichungsjahr: 2012

Beschreibung

BRICs and Beyond is an international business executive text written especially for executive and MBA students. It is based on extensive consulting in emerging economies and several years of experience teaching executive MBA courses around the globe. The author has continually faced the problem that the available textbooks for teaching international business focused almost exclusively on examples of Western multinationals for case illustrations. In the process of preparing cases nearer to the emerging market she worked in, the author realized that the often fascinating, frequently insightful and always different approach to business illustrated by these cases should be required reading for MBA students in typical Western environments too.

With its wide range of current case illustrations and concise summaries this is a new-generation text that will welcome today's MBA student to the wider world of 21st century international business.

". . . this book is needed not only because it looks at business from the BRICs points of view; it also looks at business from the point of view of tomorrow's business leaders and the challenges that they will have to cope with."
—Professor Jonathan Gosling, Centre for Leadership Studies, and co-founder, The One-Planet MBA, the University of Exeter, UK

". . . Stephanie Jones advises Western businesses on doing business in emerging economies in a refreshingly straightforward manner, integrating in a novel way her three decades of global, practical experience with the daily barrage of reporting on the BRICs--distilling from these many lessons and principles. . ."
—Extracted from the Foreword, by Professor Wim Naudé, Director of Research, Maastricht School of Management

Leseprobe

Contents

Foreword

About the Author

Chapter 1: Introduction

Part I: Risks

Chapter 2: Country Risk

Introduction

1. ‘Church and State’ – the Impact of Politics on Business

2. The Jittery Political Environment in China – Political Risk, Continued

3. Once a Communist . . . Another Form of Political Risk

4. Some Countries are (Financially) Riskier Than Others

5. The Haves and the Have-Nots – Commodity Risk

6. War and Peace

7. Kidnapping and Piracy

8. Demographic Risk

9. Discretion Can Be the Better Part of Valour – Censorship Risk

10. Information and Transparency in China

11. The Grass is Always Greener – Indian Business Avoids its Risky Home Market

12. More Country Risks. . .

Chapter 3: Corporate Social Responsibility

Introduction

1. Corruption in India

2. Corruption in China

3. Corruption Worldwide

4. Human Rights in China – and Elsewhere

5. Privacy – Another Human Right

6. Financial Scandals in Russia

7. Financial Scandals in China – and Elsewhere

8. Copyright Piracy

9. Brazil – Not Poor Anymore? How Do We Know?

10. Attempts to Create Equal Opportunities in South Africa

11. The Economic Dominance of China – the New Colonialism

12. Protection or Unfairly Excluding Competition?

13. Corporate Governance

14. IP – Especially in China

15. Monopolies

16. Gaining Respectability

Chapter 4: Business Culture

Introduction

1. Cross-Cultural Communications

2. High Power Distance

3. Big Brother is Watching You

4. Individualism and Collectivism

5. Avoiding Uncertainty

6. Relationships, Not Rules

7. Achievement or Status?

8. Showing Emotions – or Not

9. The Right Time for a Business Meeting

10. In Real Time as it Happens

Part II: Opportunities

Chapter 5: Marketing

Introduction

1. Need to Keep it Going

2. Hitting the Spot

3. Following the Herd – Especially in China

4. Keeping Up With the Joneses

5. Customizing for Success

6. Leveraging Foreign Interest

7. The Rise of the Locals

8. Areas for Future Marketing Potential

9. Still Closed to the Outside World

Chapter 6: Entrepreneurship and Innovation

Introduction

1. Leapfrogging the Traditional Path

2. New businesses for the Newly Affluent

3. From Copying to Creating

4. Innovation for Development

5. Returnee Entrepreneurs

6. India vs China

7. Breaking Down the Barriers

8. The Great Unknown – Especially the Private Sector in China

9. Do or Die

Part III: Practice

Chapter 7: Strategy and Operations

Introduction

1. Support From the Top

2. Expansion – in Different Ways

3. Attracting Chinese Money

4. BRICS Investing in Europe – Rather Than the Us

5. India – and Other Also-Rans

6. Diversity – not Keeping All Your Eggs in One Basket

7. Moving Upscale – and Downscale

8. Going for Gold

9. What’s Missing?

Chapter 8: Strategic Alliances

Introduction

1. Marriages of Convenience

2. Dipping a Toe in the Water

3. Not Getting Off the Ground

4. What’s So Special About What You are Offering?

5. Riding on the Back of the Brics

6. What makes a BRICS Country Attractive to a Western Firm?

7. Reverse Colonization

8. Getting Grounded

9. Commodities – the Name of the Game

10. East Meets West – there’s No Escape

Chapter 9: Lessons for Global Business

Introduction

Risks

Opportunities

Practice

Glossary

Reading List

Recommended Further Reading

Index

Praise for BRICS and Beyond

“In BRICS and Beyond Stephanie Jones advises Western businesses on doing business in emerging economies in a refreshingly straightforward manner, integrating in a novel way her three decades of global, practical experience with the daily barrage of reporting on the BRICS – distilling from these many lessons and principles. BRICS and Beyond is very clear about the prospects offered, but it is also sober and, as can be expected from an author who deals with the topic on a daily basis, it is grounded in reality. For attractive as the BRICS are for Western firms, they are also fraught with risks, shortcomings and frustrations.”

Extracted from the Foreword, by Professor Wim Naudé, Director of Research, Maastricht School of Management, The Netherlands

“Dr Stephanie Jones’ new book will be an essential addition for MBA delivery. The world is emerging and transforming at increasingly rapid rates and MBA programs are struggling to keep students apace of change. This is particularly true in relation to the market emergence of first and second wave developing countries. This book is timely and will be well situated to meet significant needs in business education. Written from the perspective of a highly recognized MBA educator, with practical orientation and use of case studies I can see Dr Jones’ book becoming a dynamically useful resource for MBA educators around the world.”

Dr Ian Sutherland, Assistant Professor and Director of PhD Program, IEDC – Bled, Slovenia

“. . . it is very timely to write a textbook for international business students given the recent changes in the international business environment. These changes have, as yet, not been adequately covered in the current literature. Most of what is currently on offer is directed at the conventional (American) multinational company (MNC) model and really does not cater adequately to international collaboration (the American MNC model has been generally weak on this front). Transnational emerging market corporations have become an important source of international business growth and they need a new pedagogical approach. Exploring them along with the institutional environments which shaped them through cases strikes me as a sound way to proceed. In the coming decades many students will work for or with these companies . . . MBA programs that specifically cater to executives from emerging markets would also find this textbook extremely valuable.”

Edward Buckingham, Former Director of INSEAD EMBA programmes (2008-10), France

“. . . it is very good to have cases and perspectives from all over the world . . . especially because it’s no longer ‘business as usual’ . . . now, we are looking at a world facing radical changes to the economic and political dispensations of the past, primarily characterized by climate change, the squeeze on commodities, the collapse of ecosystems on which we all depend, and a growing world population. So this book is needed not only because it looks at business from the BRICS points of view; it also looks at business from the point of view of tomorrow’s business leaders, and the challenges that they will have to cope with.”

Professor Jonathan Gosling, Centre for Leadership Studies, and co-founder, The One-Planet MBA, University of Exeter, UK

“I just read Dr Jones’ new book and must say that this is very useful, especially for those interested in international business beyond the traditional markets. In addition to the members of our World Trade Center’s International Business Club and clients, our international clients of NASH Consulting are now reading it. Until now, I have not seen a business textbook that is covering so many emerging markets and so many relevant topics at once. For companies wanting to make a strategic choice about where they want their new markets to be, this book is of great value.”

Joost Dijkstra, Director, World Trade Centre, Heerlen, Aachen, Germany

“. . . in today’s business realities, ethics and issues concerning responsibilities are increasingly linked to matters of identity, both as national and especially as business culture. The sequence of chapters in the design of Dr Jones reflects this new reality, and for that reason it helps prepare students much better than most comparable books do.”

Joop Remmé, Managing Director, KnowDialogue, The Netherlands

“The Case Study Method is one of the best ways for today’s management students to learn how to approach real life business issues. However, the greatest weakness of this method has been lack of case studies which draw on the issues faced by managers in markets outside of North America and Europe. With this publication, we are looking forward to offering contextually relevant business case studies to our students.”

Oliver Olson, Program Director, Maastricht School of Management, Romania

“Somewhat paradoxically the ultimate aim of teaching MBA students of developing countries isn’t to teach the theory of business but the practice. Stephanie Jones is doing an excellent job providing in this book an abundance of practical cases based on real emerging market practice – and by doing so she is filling the gap. Approaching business from this perspective has been long neglected. Well done! Students from newly developing countries can no longer escape. They will be provoked to think about starting businesses in their home countries.”

Leo Kerklaan, Director, Franeker Management Academy, The Netherlands

This edition first published in 2012

Copyright © 2012 Stephanie Jones

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Library of Congress Cataloging-in-Publication Data

Jones, Stephanie, 1957-

BRICS and beyond : executive lessons on emerging markets / Stephanie Karen Jones.

p. cm.

Includes bibliographical references and index.

ISBN 978-1-119-96269-4 (cloth)

1. International business enterprises—Developing countries. 2. Social responsibility of business—Developing countries. 3. Diversity in the workplace—Developing countries. 4. Industrial management—Developing countries. 5. BRIC countries—Foreign economic relations. I. Title.

HD2755.5.J6676 2012

658’.049—dc23

2012016641

A catalogue record for this book is available from the British Library.

ISBN 978-1-119-96269-4 (hardback) ISBN 978-1-118-35156-7 (ebk)

ISBN 978-1-118-35151-2 (ebk) ISBN 978-1-118-35157-4 (ebk)

To Clive, with love

Foreword

One can hardly do business anymore without an understanding and knowledge of the global impact of a handful of emerging economies, labelled the ‘BRICS’ – an acronym denoting Brazil, Russia, India, China and South Africa. Whereas half a century ago these were all developing countries and, with perhaps the exception of Russia, marginal in world affairs, today they are aspiring to be fully modern economies. They possess nuclear capabilities and space programmes; they include the world’s most populous democracy (India), largest country (Russia) and second biggest economy (China); contain 60% of the Amazon rainforest and boast the record-holding champion of the FIFA Soccer World Cup (Brazil); and can lay claim to the world’s largest diamond and longest wine route (South Africa). The list of achievements and contribution to the world’s ‘best and largest’ is a remarkable and growing one.

While many Western economies – most notably the Eurozone and the United States – face high debt burdens and sluggish growth, the BRICS have been the ‘southern engines of global growth’. Through the global outsourcing of production they have become integrated into the very fabric of traditional Western multinational firms. As a result there are now very few national or domestic-based industries in the world. Countries and firms do not compete anymore in physical products but in capabilities and in the ‘intangibles’ that give them a claim to sharing in the global value chain.

While the BRICS have been central in the emergence of a truly global production system they are not the only emerging economies of which to take note. Their influence, their growing geo-political and strategic posturing in global affairs and their investments abroad have had significant ripple effects across the emerging world. From Africa to Indonesia and Malaysia to the island economies of the Philippines and Pacific, business and entrepreneurship have been given a vibrant boost. The BRICS’ rise has spilled over to benefit economies beyond their borders and their traditional sphere of influence.

In BRICS and Beyond Stephanie Jones advises Western businesses on doing business in the BRICS and other emerging economies. She does so in a refreshingly straightforward manner and integrates in a novel way her practical experience (gained over more than three decades as teacher, explorer, entrepreneur and traveller) with the daily barrage of reporting on the BRICS – distilling from this many lessons and principles for sustainable business. BRICS and Beyond is very clear about the prospects offered by these southern engines of global growth. But it is also sober and, as can be expected from an author who deals with the topic on a daily basis, it is grounded in reality. For, attractive as the BRICS are for Western firms, they are also fraught with risks, shortcomings and frustrations.

Some of these downsides are reflected in the fact that China and India remain, in per capita GDP terms, poor countries. China is concerned that it would not be able to complete its rural–urban transition before its aging population erodes its low-cost labour advantage. India is amassing troops on its northern border and is in a naval arms race with China in the Indian Ocean. With more than two million soldiers China has the largest army in the world (India has the third largest with almost two million soldiers). Its military expenditure is growing in excess of 10% annually. Today, China and India alone account for around 15% of all military imports in the world – more than 80% of that supplied by Russia (and a sizeable portion by South Africa). In Russia and South Africa the transition towards democracy has been anything but perfect, and great social and economic inequalities remain alongside corruption, crime and violence. Doing successful business in these countries requires a sound understanding of the country risks involved. It also requires the important realization that Western businesses can and should make a positive societal impact and not only see these countries as places for easy profits. Ultimately, the improved welfare and wellbeing of all the people in the BRICS are what matters most. For this a high standard of ethical behaviour, sensitivity to cultural differences and the environment, and appropriate corporate social responsibility initiatives are minimum requirements. BRICS and Beyond offers useful hints on these, and more.

Professor Wim Naudé

Director of Research, Maastricht School of Management

About the Author

Dr Stephanie Jones is Associate Professor of Organizational Behaviour at Maastricht School of Management (MSM), having graduated with a PhD from University College London, and a Bachelor’s degree from the London School of Economics. Dr Jones has authored over twenty-five full-length internationally-published books on business and management. Her most recent books include Nelson’s Way: Leadership Lessons from the Great Commander (2005), textbooks for MSM on thesis writing, leadership and culture (2007–9), Psychological Testing (2010) and Leadership: Key Concepts (2012). Previously a journalist and consultant, she has lived and worked in Hong Kong, China, India, Australia, Dubai, Kuwait and Egypt. She teaches MBA students based across the world, in Asia, Africa, the Middle East, Eastern Europe and South America, especially courses on leadership, culture and change management. She has recently published articles on entrepreneurship and innovation in business, business in emerging markets, business ethics and Corporate Social Responsibility (CSR), leadership, knowledge management, human resources, business culture and project management.

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 liberals and the patriotic conservative hard-liners. However, the Communist Party continues to be jittery about the possible spread of an Arab-style ‘jasmine revolution’ to China, and the Party is all the more anxious as it celebrates the ninetieth anniversary of its foundation, although in reality it is probably stronger than ever.

3. Once a Communist . . . another form of political risk

Western businesses entering previously Communist-run countries must be prepared for the presence of strong governmental control in apparently privatized enterprises – just because they have been privatized, it doesn’t mean they are private in the Western sense. Anecdotal evidence from the field suggests that nasty surprises can emerge when businesses from the West invest in formerly state-owned utilities, for example, because they are still, to all intents and purposes, state-owned or at least state-directed.

For example, a Western European-owned power utility recently purchased a nationwide power supply operation in a former Communist country and soon realized that the prices paid by the consumers – previously heavily subsidized – made their purchase massively unprofitable. They would have to put the prices up to break even, let alone make a working profit. The Western multinational company was then informed by the vendors – the government – that price rises were simply not allowed, as this would make the government unpopular in the election run-up. Its fingers burned in this ill-fated acquisition, the European power utility is looking to dump this now unattractive acquisition – but it’s looking difficult, as other possible purchasers have wised-up to the problem.

Vietnam, especially the buzzing city named after Ho Chi Minh (formerly Saigon), hardly appears to reflect Communist values, but they are there all the same. Visits to a local business partner can sometimes produce surprises – what happened to that pleasant co-operative person we used to work with? Why did he suddenly disappear and reappear in a lowly job in the wilderness, when he was in a trusted senior position and apparently doing a good job? Perhaps his competence was nothing to do with it – maybe he was negatively showing up a colleague who was better-placed in the Party.

The same thing can happen in Kazakhstan, now an independent country and free from the former Soviet yoke – or is it? Will our partner colleague there, freely critical of corruption in his country and trying to find a better way, still be around for long when he continues to delight in exposing the ills of society he sees around him?

China is still, of course, officially Communist, but many new developments suggest that changes of a strictly non-Communist nature are under way – such as the rise of a middle class. This group can be potentially in conflict with the ‘alienated’ people in the population, especially those from poorer areas seeking their fortunes in the big cities, lacking the city-dweller resident status or hukou (see below). Relations between China’s rich and poor are likely to create more political risk in the future, especially as the middle class was virtually non-existent until the late 1990s. Up to now, well-off city-dwellers have traded the lack of political choice and activity for a new level of prosperity, but they are bound to want more political representation in the future, and meanwhile the economy is slowing down. The Communist Party is struggling to maintain this prosperity, with inflation at 5.5% – although it was much worse, at 27.7%, in 1994.

For a Communist country, China is facing many contradictions, becoming a middle-income country, and with an ever larger number of elderly people. China’s state-owned businesses have an insatiable appetite for capital and need much more money. Curbing state companies means that the government will have to deal with all the well-connected people who ride on their coat-tails, including many members of the middle class. Meanwhile, the system of household registration, or hukou, the internal ‘passport’ system, defines even long-staying urban migrants as rural residents, cutting them out of housing, education and other benefits, leaving a dissatisfied, disenfranchised group of potential dissidents.

Anecdotal evidence suggests that people in China still like to see themselves as good Communists, however elitist, capitalistic and middle class they have become. One expatriate businesswoman was observing her local Chinese manager, who had recently become a father. He was buying disposable diapers and foreign-branded milk powder for his child, and was buying a bigger family car. All his clothes, electronic gadgets and even his cigarettes were imported, heavily branded and the most expensive. But he was most upset at being (humorously) teased as becoming quite a capitalist. So this might be seen as an Emperor’s New Clothes problem – these countries propound modernity but are still rooted in the past, and are facing an identity problem as many of the new values of society conflict with the old.

4. Some countries are (financially) riskier than others

Financial risks can take many forms – including out-of-control inflation, poor financial management, banking failure, local government insolvency, high levels of wealth accumulation by authoritarian leaders in contrast with a majority of very poor, difficulties in collecting taxes and a lack of basic purchasing power in countries with many low-income people. These risks are not confined to emerging market countries but can be seen as creating greater problems in emerging markets, especially in terms of holding back economic development and deterring outside investors.

Inflation is one of the biggest country risks faced by nearly all emerging market countries, and the impact of inflation and price rises in China especially will inevitably affect business decisions there and overseas. The Chinese economy may be growing between 7% and 9% still, but price rises of over 5% are higher than most observers expected. This is also impacting the stability of the regime, an issue of bottom-line importance to the Chinese bureaucrats, as this is something they will never compromise. The Chinese government’s decision to raise the income tax threshold by a third was designed to reduce the burden on wage earners and counteract price rises to boost domestic demand and stimulate the economy. The level of control exerted over the Chinese economy may be seen as completely at odds with the situation in much of the West, and can be hard for Western executives to envisage, but it does mean that China can be less risky generally and more predictable and stable than many other BRICS and beyond countries.

Inflation in South America, by contrast, is becoming more and more out of control. Rather than trying to nip it in the bud at source – as in the case of China – some South American countries are adopting the policy of trying to offset its worst effects. Hence, in Venezuela, minimum wages and pensions are being hiked to compensate for increased living costs, especially to encourage government popularity with an election looming. Brazil’s increasingly tough labour laws seem to be designed to have the same effect – politicians are also concerned with high and rising inflation, even though unemployment is still fairly low. The impact on prices and their tendency to rise is dangerous, despite the fairly strong economic growth of around 4.5% per annum in the early part of the 2010s. Inflation is at the upper limit of the central bank’s target range, and the country doesn’t have a clear way of dealing with it so far.

Rampant inflation is an almost permanent country risk in countries also associated with recent political upheaval, especially related to supply issues. Hence, Egypt is suffering from the highest-ever inflation in recent years and record food prices. Urban consumer inflation reached over 12% in April 2011, with food prices rising 1.2% per month. Any business setting up in Egypt has to cope with this situation, and the continued instability it will inevitably bring.

Some countries that were apparently financially stable in the past can suddenly start experiencing financial management problems and increased financial risk. An example is Botswana, long seen as one of the most stable, prosperous and least corrupt countries in Africa, previously thriving on its diamond business. Since June 2011, the country has been shaken by its first nationwide public sector strike, in which police – usually unarmed – used tear-gas and rubber bullets to disperse rioting secondary-school pupils, and then went on the rampage, in a reaction against the president, now seen as too authoritarian. Botswana’s diamond bonanza, which accounts for nearly half of the government’s revenue and over a third of its GDP, will apparently not last much longer, with growth slowing from 13% after independence in 1966 to 7% in 2011. Meanwhile, the government is still spending 40% of GDP, as if it had the same revenues as in the past.

Banking failure, reflecting heightened financial risk, is a very real country risk in Russia, in particular. Nearly one-third of Russian banks are apparently ill-prepared for another global financial crisis. A stress test by the central bank resulted in nearly $40 billion in state support being provided to stop these banks from going bust. At least 300 of Russia’s 900 banks could see their capital requirement fall below the 10% minimum required if faced with another economic downturn – and then they would have their licences revoked. Financial recessions – especially in apparently politically and financially unstable countries – tend to be quickly followed by rapid deposit outflows and a paralysis in interbank lending. In Russia, the estimated 321 banks judged to be most at risk are controlling half of the country’s financial assets.

If banking failure is a very specific and immediate country risk in Russia, the country has long laboured under the reputation of having an unpredictable investment environment. Foreign investors have piled into China and India instead – so what can Russia do about this? One option is to attract large global private equity groups – but how to do that? The Russian President, in mid-2011, considered the idea of creating a $10 billion Russian state-backed private equity fund – to attract these groups and various sovereign wealth funds – by creating a stronger foundation for their investment climate. But Western players are not yet entirely convinced.