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Published: August 8, 2014
 / Autumn 2014 / Issue 76

 
 

Doing Business Where Governance Is Weak

Eight principles for succeeding in markets prone to ethical and legal risks.

Across Asia and the Middle East, rising incomes and accelerating investment in infrastructure have attracted multinationals eager to expand their global presence. But success in these high-growth emerging markets (HGEMs) often proves elusive. Several recent reports and surveys suggest why: Many HGEMs rate poorly on the World Bank’s “Ease of Doing Business” index, on Transparency International’s “Corruption Perceptions Index,” and on the Economist’s “Crony-Capitalist” index. These rankings make clear that strategies and business models tailored to the regulations and laws of mature markets may not translate well into HGEMs, many of which are characterized by opaque regulatory climates, weak institutions, and invisible influence networks that may expose companies to unacceptable legal and reputational risks.

Meanwhile, regulations on international practices in many companies’ home countries are getting stricter. The 34 Organisation for Economic Co-operation and Development (OECD) members and six other nations that are signatories to the OECD Anti-Bribery Convention are increasingly enacting laws criminalizing the bribery of foreign officials. In one high-profile example, several managers of Securency International (then a subsidiary of the Reserve Bank of Australia and since sold to Innovia) were charged in the Australian federal courts with bribing or conspiring to bribe officials in Indonesia, Malaysia, and Vietnam, leading to a flood of negative media coverage.

The institutional weaknesses of HGEMs are often deep-rooted and are best understood in the context of those countries’ histories. At the end of World War II, many of today’s Asian high-growth markets had per capita annual incomes of just a few hundred dollars. They were emerging from a combination of Japanese occupation and colonial domination that left in place ineffective national institutions and hybrid legal systems that combined customary laws, colonial-era laws, and a modern constitution.

During the next four decades, even as these so-called Asian miracle economies grew, their leaders—often military or former leaders of national liberation movements—failed to undertake badly needed structural fixes to the legal and administrative institutions they inherited. Instead, to rapidly build national infrastructure, grow national companies, and finance the political process, many postwar officials created informal, top-down networks of local blue-chip companies whose leaders had close associations with the ruling families or parties. For example, in Indonesia, under its second post-independence president, Suharto, our sources have claimed that any project costing more than about US$50 million had to involve a member of Suharto’s inner circle—a group of 24 family members and trusted advisors. This top-down “sponsorship” by well-connected individuals created price distortions and a lack of transparency, but it also accelerated infrastructure and other development by shielding these projects from administrative or military interference.

Today, even as disposable incomes in these countries grow, it will likely be some time before their institutions and regulatory climates mature. Those seeking to do business in HGEMs may believe that decisions in this environment can still be achieved only by the transfer of “commissions” to individuals or political parties. However, in addition to being illegal, such methods may no longer be effective. During a private discussion in one large emerging Southeast Asian democ-racy between the billionaire head of the leading chamber of commerce and a newly elected senior economics minister, the chamber head complained that the transition from autocracy to democracy was bankrupting his members, because they no longer knew who to pay.

Managing the complexities in HGEMs won’t be easy, but the following eight principles can pave the way for success.

1. Align vision and values. The team leading the HGEM entry has to engage corporate leadership to develop a vision of near-term success for the HGEM portfolio. Planning at the portfolio level gives the execution team the flexibility it needs to quickly reallocate resources and thus accommodate fast-changing conditions in any one market. It is also important for companies to refresh their corporate ethics and values policies, and to engage and educate the board, business unit leaders, and key internal stakeholders—as well as the teams that will be responsible for on-the-ground delivery. One U.S.-based multinational that had been losing out to a large foreign rival in HGEMs found that a focused strategy coordinated from the CEO’s office and supported by a high-level local advisory council allowed the firm to identify and selectively support priority programs—such as leadership development—with national leaders. These programs led to a degree of protection for all the business units from the attention of corrupt individuals.

 
 
 
 
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