A number of events – the emergence of terrorist groups with global reach, the wrenching problems of introducing economic reforms in emerging markets such as Argentina, and the massive attention paid in more developed economies to Enron-type corporate governance failures – all seemed to come together in a way that spelled the end of rapid growth and worldwide market liberalisation.
For many media observers, the symbol of the international economy in the 1990s was the annual business conference in Davos, Switzerland, where thousands of corporate executives and politicians gathered from around the world to network. Today, however, this symbol has been replaced by a rag-tag coalition of protestors, ranging from trade unionists to environmental activists, who regularly disrupt annual meetings of the WTO or the IMF.
But beyond this media-fed conclusion lies a more complex reality: the process of globalisation is still under way, but in a different manner. A decade ago, the major companies in the OECD world – the engines behind globalisation – took the spread of international trade and investment for granted. Today, this is not the case. Indeed, in a recent survey conducted with a group of our key clients, we found that the problem is not that globalisation no longer holds important business opportunities. Rather, it is that in order to capture these opportunities, companies must become far more sophisticated about how to operate in a more open, but also more risky environment.
The clients we surveyed do business in a range of areas, including the natural resources sector, financial services, high technology and consumer products. They all agreed that in doing business in challenging markets, reliable information was at a higher premium than ever before. They reported that despite all the media attention focused on global terrorism and regional crises in trouble spots, such as the Middle East, they are more preoccupied with mastering a narrower range of business risks. In particular, six key risk areas were highlighted:
- Local corruption in business and government. This has emerged as a primary concern of our clients in the US and Western Europe, particularly in working in emerging markets. The ranges are from petty corruption, endemic in India and other south Asian markets, to more organised and dangerous criminal groups in countries such as the Ukraine.
- Lack of transparency in accounting and banking practices and standards. Many countries have failed to adopt either US or international accounting standards, which creates real difficulties for foreign investors to reliably measure financial performance. “The lack of transparency is one of the single biggest impediments to doing cross-border deals,” a senior investment bank manager told us.
- Bias in local government regulations. In many markets, regulatory rules are not consistently enforced or conveniently bent as a result of political pressure. The operations of central banks are also at times politicised, which can severely complicate financial transactions.
- Predatory business practices by competitors. Many clients complained of the lack of a ‘level playing field’ in various markets, as a result of unfair behaviour by competitors, both foreign and local. Bribery was the most visible manifestation of such practices.
- The danger of picking the ‘wrong’ partner. While clients told us they recognise the strategic importance of entering high-potential markets, such as China, they are deterred by questions concerning possible local partners. Standard, Western-style due-diligence techniques are often inadequate in the face of complicated offshore financial structures, or the origins of funds murky. Partner selection can result in reputational damage. The general counsel of a client in the energy industry noted: “We learned our lesson after rushing into a joint venture without properly reviewing our business partner. We now have a very thorough process for evaluating individuals and companies”.
- Physical security threats. After 9-11, companies are highly sensitive to the risks of terrorism and related forms of political violence. This is true for ‘traditional’ problems, such as in southern Russia, Columbia, Pakistan and parts of south-east Asia, but our clients now also express concern about central Asia, northern Africa and, of course, the Middle East.
All in all, our clients recognise that a combination of factors – the growth of terrorism, the Argentine crisis and even the Enron affair – have come together to complicate the globalisation process. At the same time, their appetite for international expansion has not diminished. They also recognise, as we do, that companies can succeed in challenging markets if they have the information they need to fashion prudent and effective strategies. Hard-to-get information will be a key factor for success in the new, more risky international business environment, and this is precisely what companies like Diligence LLC are committed to delivering.
|Corruption within business and government sectors||1|
|Local accounting and banking practices||2|
|Effectiveness and fairness of local government regulations||3|
|Behaviour and business practices of competitors operating in the region, ie. is there a level playing field?||4|
|The credibility and/or transparency of a potential local partner or local investor||5|
|Local crime concerns and general security of the environment||6|
|Possible influence of local organised crime||7|
|Local labour issues, including stability, availability of necessary skills within local labour force etc.||8|
|Quality of existing infrastructure, ie. transportation, power, water||10|
* Richard Burt, a former assistant secretary of state and US ambassador, is the chairman of Diligence LLC. William Webster, the former director of the FBI and the CIA, chairs the firm’s Senior Advisory Group.
Visit Diligence LLC at: www.diligencellc.com.