Inches from Greatness!

 or

how Ukraine’s business can unlock at least UAH15 Billion of American financing in 15 months

By: Alexander Gordin, Managing Director, Broad Street Capital Group and Co-Creator of the Fluent In Foreign
September 24, 2012 New York, NY

Last week I attended a business dinner with a high-level delegation from the Ukrainian Government. The dinner was organized by the US-Ukraine Business Council and sponsored by couple of large corporate players and a private equity fund.  During the event, Ukrainian attendees, which included Governor of the National Bank of Ukraine, Ministers of Finance, Agriculture, Ecology, as well as Customs and Tax Chiefs, tried to signal to the U.S. companies in attendance how Ukraine has evolved into an attractive investment destination.

As I was listening to the presentations and discussions by several large corporate players focused on investments into the Ukrainian Oil & Gas and Agri sectors, I could not help but think that, as the Government of Ukraine is making a massive effort to attract U.S. direct investment from Fortune 500 companies and restart the IMF financing, it is leaving on the table billions of dollars readily available debt and equity financing, as well as investment by smaller strategic players.  There is an entire medium size business and project development sector in Ukraine that is begging to be funded and there are funds readily available in the U.S. to fund tens, even hundreds of companies and projects in sectors ranging from hospitality, food security and ICT to agriculture and alternative energy.

Injecting significant funding into this slice of Ukraine’s economy will generate thousands of new jobs; increase corporate efficiency and productivity by introducing latest western technologies and production tools. It will also create a multiplier economic effect, which will reverberate throughout the country’s business and consumer sectors.  Yet, for the last couple of years, only a tiny sliver of the entire American originated debt and equity financings that could have been done in Ukraine has been completed.  In 2011, U.S. was the in 10th place of all the countries that had Foreign Direct Investment into Ukraine, with only $1bln invested.

The big question is WHY? For those of us both in the US Government Trade and Development Agencies and in the private sector, who are focused on financing projects, enterprises and trade, the answer is pretty simple – Disconnect, Distrust and Deficiency, or as I call them 3Ds.

There is disconnect in understanding of western financing process and of the requirements set forth by the U.S. Government agencies and private financial institutions.  Many Ukrainian businessmen spend a lot of time and effort in putting together sleek-looking presentations overloaded with information, setting up technical models and writing business plans using prepackaged software. Yet, most of them fail to truly understand the needs and requirements of the American financiers and their focus on project’s ownership, provenance, due diligence etc. They also do not understand that unless they commit financially to the capital raising process, they will not be perceived as serious players.  There is also a huge image problem that Ukraine has in the West. Although some of it is well deserved, a big part of it is gloom and doom that does not accurately portray the situation in the country.

Then there is distrust. Over the last two decades, Ukrainian business has been pillaged by every type of western con artist known to man. Many swooped in, promised Ukrainian businessmen untold riches, massive credits and investments, collected fees and then vanished.  No wonder today Ukrainian companies are wary, scared and mistrustful.

Finally, there is deficiency.  Deficiency of cross cultural knowledge among the process participants on both sides of the Atlantic; lack of early stage pre-project funding and absence of an integrated well-defined and officially endorsed process, which would nurture and properly prepare companies and projects to be able to take advantage of all the available opportunities.

Estimates are that in today’s environment only one of 20 potentially eligible projects and companies seeking financing in Ukraine get funded.  We at Broad Street Capital Group have been working on solving the above-mentioned problems in order to increase the quality of bankable projects for the last several years. We assembled a group of leading international experts in the fields of risk management, cross-cultural expertise, accounting and audit, corporate law, debt financing, equity funding and media public relations, Together, we have worked to develop a streamlined preparation process to help companies achieve their goals of cross-border market entry, international financing, technology partnerships and foreign direct investment.  The result has been a comprehensive multimedia platform called Fluent In Foreign Business™, which provides assessment, project screening, education, information resources, quality networking opportunities and expert mentoring support to government agencies, companies, investors, franchisors and project developers in over 100 countries.  What this process needs to unlock a floodgate of financing to Ukraine is a modest amount of UA Government support.  The Government should use one of its several investment promotion agencies to work with us in the private sector and to offer official endorsement, information dissemination, and participation leadership to encourage or even mandate Ukrainian businesses to take part in the process without fear of being duped.

Simply given the current portfolio of Ukrainian alternative energy, agriculture and ICT projects, which we are reviewing, we can confidently say that with just a modest amount of UA government support, combined with corporate focus, training and financial commitment, Ukrainian companies can attract at least UAH 15 Billion in low-cost debt, equity and trade financing in the next 15 months.  This is over two times the amount that Ukraine to receive from all International Financial Institutions (IFIs) in 2013 combined. Thousands of jobs and the multiplier effect generated by this initiative will help the government strengthen its business electorate base, improve country’s investment image and its overall economic condition. Thus if Ukrainian government officials are serious about improving the country’s economic situation, they should closely look at the what is needed to unlock a very significant slice of financial investment into a critical sector of its economy.  American businesses and professionals who are Fluent In Foreign Business stand ready to help Ukraine meet the challenge of successfully injecting UAH 15 Billion in 15 months.  November 28th-30th Broad Street Capital Group, along with Fluent In Foreign Advisory Board will hold a briefing and project review sessions for all interested companies, Ukrainian Central and Regional Government Authorities to select projects eligible for the 2013 financing and inclusion into UAH 15 Billion in 15 months Initiative.

About the Author: Alexander Gordin is a Managing Director of the Broad Street Capital Group (a USUBC Member since 2009) and co-creator of the Fluent In Foreign enterprise, which publishes Fluent Foreign online, Fi180 Global Business Atlas and weekly newsletter.  Since June, 2012 the edition has a dedicated section for Ukraine. Gov. Arbuzov’s interview with Mr. Gordin appeared in the inaugural edition of the publication. (https://fluentinforeign.wordpress.com/?s=arbuzov)

Mr. Gordin has been active in Ukraine as Direct Investor since 1995 and as Financier since 1996. Mr. Gordin and the Broad Street Capital Group have represented numerous Ukrainian Government and private entities and have been mandated for financing and political risk Insurance transactions totaling over US$1 Billion.

Rethink Your Assumptions About Opportunity in Africa

as seen in the HBR Blog Network

by Jonathan Berman  |   HBR Blog Network September 14, 2012

“There are children starving in Africa. Eat your peas.”

Surely I am not the only person whose first impressions of Africa were shaped along these lines. Whether it was your mother excoriating you about wasting food or an advertisement for Oxfam showing malnourished babies, the earliest impression of Africa many of us have received is of deprivation.

While that’s still a reality, it is by no means the whole reality. More importantly, it is not the reality that will have the greatest impact on Africa’s future, and yours.

The more forward-looking reality is that Africa is a dawning success, a globally-important locus of innovation and sustained growth. In the decade just past, Africa’s economy grew at 5.7% annually. The IMF’s most recent projection (in which it downgraded global growth estimates by one basis point) is that Africa’s economy will continue to grow this year by 5.4%, more than twice the anticipated growth rate of Brazil. For those who wonder if that is growth off a tiny base, it is not. Africa’s formal economy is $1.9 trillion, slightly larger than India’s, and about as big as Russia’s. And, after two slow decades, it is now growing at over 5%.

So, what is Africa? The turnaround story of the new century, and a business opportunity of titanic proportions. Consultancies including McKinsey, BCG, PWC and KPMG have ably documented it. Quality journals like the Financial Times and The Economist (which fully and honorably recanted its unfortunate May 2000 description of Africa as “the hopeless continent”) now report on African growth regularly. Terrific blogs like The Africa Chronicles and How We Made It in Africa take it as a given.

Nonetheless, in my experience the vast majority of businesspeople and policy makers are either unaware of the change underway in Africa or underestimate the associated opportunity. Not long ago, I led a team interviewing thirty of the top global US investors, financial intermediaries and trade experts about Africa. We asked them how many African companies they thought had more than $100 million in annual revenue. The typical response was between 40 and 50. The correct answer is over 500 and over 150 African companies have annual revenue of $1 billion or more, according to the indispensable Africa Report.

For those wishing to see the story clearly, it may be helpful to call out some of the lenses that distort our vision of Africa today and then propose one corrective lens. Let’s start with the distortive lenses. While there are many, this is my informed, if subjective, priority of the top three.

First there’s the preconception of Africa as the embodiment of need. Our mothers, their peas and all the other major influences of childhood have a remarkably persistent impact on our adult, and even professional, perception of Africa. Those perceptions are reinforced by a news media (the above exceptions notwithstanding) that is quick to cover famines, slow to cover successes. By successes I do not mean the occasional ox farmer or microenterprise doing well, which is critical to reducing poverty but of limited interest to a business audience. I mean African business successes at scale, like the mobile banking innovator Safaricom or the world-beating new media company Naspers.

Second, the entertainment sector has built a fortune depicting Africa as a place of happy animals and miserable people. In global entertainment, the only empowered Africans are the Lion King and Idi Amin. Nelson Mandela is doing OK, but only after 27 years in jail. Africans who are not animals, despots or Nelson Mandela are portrayed as suffering under the heel of poverty, war and disease. Think of the last two movies you saw with Africans in them and you’ll see what I mean.

Finally, even when there is reporting on African success, it doesn’t stick because we are rarely exposed to the people leading that success. The data is out there, but fails to penetrate or provide real insight. For that, you need to begin to understand the people succeeding in Africa and their perspective on what it means to win.

I happen to have spoken to two of those people this week. They are quite different, but their perspectives are remarkably similar.

Sam Jonah is the CEO of Jonah Capital, the former CEO of AngloGold Ashanti, and described by Forbes as among the 20 most powerful businessmen in Africa. Born in Ghana, not far from the company’s mines, Sam led Ashanti in its successful bid to become the first African company to list on the NYSE, and today he serves on multiple boards across many of Africa’s growth sectors. I asked Sam what US companies could do better to capture the opportunities in African growth. “Be bold.” he said without hesitation. “You need the full commitment that US companies showed in Europe after WWII, in Mexico with NAFTA, and in China in the current decade. I talk to a lot of US companies ‘looking’ at Africa, testing it on the margins. That will not work. The companies that succeed here take bold, assertive action.”

Perry Cantarutti’s background could not be more different from Sam’s, but his experience bears out Sam’s counsel. Born and raised in the San Francisco Bay Area, Perry went to business school in Chicago, and joined the aviation industry to “see the world and bridge peoples and cultures.” Today he leads Delta Air Line’s business in the Europe, the Middle East and Africa. Delta began direct flights from the US to Africa with two routes in 2006. Today it is flying direct to five cities, the largest presence of any US airline. “We are committed to Africa for the long term,” Perry told me recently. As an example, he recalled his company’s initial flights into Liberia, a formerly war-torn country now enjoying the growth born of peace and democratic governance. “I was a passenger on our first plane the day we landed in Monrovia (Liberia’s capital). Touching down at that airport was as safe and secure as landing in any airport in our network. To get to that day takes a different investment than we make at home — we were full partners with government in building out that airport, its infrastructure and systems. In many ways it’s the role we played in the earliest days of aviation in theUS.”

Sam’s comments and Perry’s reminded me of a lens through which I sometimes see Africa today: A continent at the dawn of its emergence, a bit like America at the dawn of the last century. The promise is as vast as any I’ve encountered in twenty years in frontier markets. So are the challenges, and the personalities of the men and women rising to meet them.

Jonathan Berman

JONATHAN BERMAN

Jonathan Berman is an author and advisor to Fortune 500 companies and investors operating in frontier markets. His views on frontier markets have appeared in the New York Times, Financial Times and Wall Street Journal’s CFO ledger. His first book, Success in Africa, will be published in 2013.

Business Is Sweet – How Godiva is expanding into China

Godiva Chocolatier is enjoying double-digit growth, thanks in part to innovative chocolates and expansion in Asia, says CFO Dave Marberger.

Marielle Segarra, Growth Strategies | September 01, 2012 | CFO Magazine

If anyone knows brand loyalty, it’s Dave Marberger. He witnessed it firsthand as the former finance chief of Tasty Baking, the Philadelphia-based maker of Tastykakes, a line of packaged baked goods beloved in that city. And he sees it now as CFO of Godiva Chocolatier, the famous purveyor of premium chocolates. Godiva operates more than 600 retail stores around the world, and it has no trouble selling its gold-boxed offerings in a variety of other channels as well. The company’s sales have grown more than 30% since 2008, to $650 million in 2011.

Now, Godiva is trying to grow its fledgling presence in a potentially vast market: China. The company so far has 24 stores in that immense country, where per-capita consumption of chocolate lags far behind that in Europe and the United States. But Godiva is nothing if not adaptable, priding itself on being a bit of an innovation machine. About 30% of its sales growth comes from products rolled out in the last 18 months, such as its Ultimate Dessert Truffles, which provide bite-size versions of popular desserts like red velvet cake, crème brûlée, and chocolate soufflé.

To capture its share of China’s market, Godiva has introduced several product lines specific to Chinese culture and customs, such as dragon-themed chocolates for the 2012 Chinese New Year. Recently, Marberger talked with CFO about Godiva’s focus on innovation and its reach into China.

How important is Asia to Godiva?
Asia is a priority market for us. We have a sizable business in Japan, which we’ve been in since the early 1970s. Three years ago, we started opening stores in China. By the end of this year we’ll have around 30 stores, in Shanghai, Beijing, and some tier-two cities. We’re pleased with how quickly the business has grown. Our same-store sales are very strong.

How are you building brand loyalty in China?
We don’t have the brand awareness there that we have in the U.S. or Japan. But one thing that has helped us is that we have a global travel retail business, what we used to call duty free. You will see Godiva in any airport around the world, and that helps build awareness. People who live in China will start to see the Godiva brand as they travel.

Where is Godiva seeing the most growth now?
We’re seeing strong growth in all of our retail stores, in every region. We had double-digit growth in 2010 and 2011, both in North America and international. We attribute that to the investment we’re making in the brand through innovation. We have great chocolate, but you have to continue to surprise consumers with new products that excite them to come back to the brand. We’ve also had a lot of success in the U.S. with our customer loyalty program, and now we’re rolling that out globally as well.

So you’re seeing strong growth in retail stores. What other channels do you have?
A big focus for us in terms of strategy is to be more accessible and relevant to the consumer. Particularly in the U.S., we have decided to go into certain grocery stores, drugstores, and mass merchandisers. We go where we think it makes sense for the brand. Also, we have a new platform of products — individually wrapped chocolates — that has allowed us to get into some grocery stores and drugstores.

What other kinds of product platforms does Godiva have?
We have a dessert platform that we continue to innovate against — for example, our Ultimate Dessert Truffles and our Parfait Chocolates. Our Ultimate Dessert Truffles are outstanding pieces of chocolate, but you associate them with a dessert, so it’s broader than just pieces of chocolate. We have different seasonal items and platforms, and when they do well, they can become part of the core [lineup of products].

When you introduce new products, do you get rid of older ones?
You can’t just keep adding products faster than you take them away, because you’ll build so many SKUs that [the product lineup] will become too complex. A big part of our focus has been, what products are going to go away? It comes down to a lot of different factors.

For example, you have minimum thresholds around sales. Strategically, what’s the role of a particular item? Has it been around for a few seasons, and is it time to refresh it? If so, you might take that one away and build on it with the next generation of that type of item. There’s a whole process of innovation that drives those decisions.

Can you give an example of a new product that didn’t perform that well?
When we launched Gems in 2009, we had three varieties: truffles, caramels, and solids. We found that our consumers were buying the truffles and caramels because they were what Godiva was known for, and they resonated better with them. If consumers wanted plain chocolate, they would buy one of our large tablet bars, not the solid Gems. We discontinued the solids and continue to innovate the flavors of truffles and caramels.

Godiva is owned by Yildiz Holding, a Turkish conglomerate. How often do you interact with them?
I talk frequently to the CFO of our parent company. We have a lot of interaction in a lot of different functions. We’ve been able to leverage their expertise in operations and supply chain, research and development, quality, and procurement. They’re a very large and profitable company, so that gives us strength to obtain more-attractive financing [in the capital markets]. When we procure cocoa and chocolate for the business, we talk to them on a daily basis about how they see the markets.

Cocoa prices have been dropping for months. How do you cope with the ups and down of commodity costs?
We don’t have a crystal ball, but we try to understand what’s happening in the market. If we have an opportunity as the price comes down to lock in future purchases, that’s what we try to do. That’s where we really benefit from Yildiz and its understanding of the market. Obviously, cocoa is one component — the critical component — of total cost. As we grow the business, we have to look at where all costs are going.

As CFO, what is your top concern right now?
Since we’ve been owned by Yildiz, it has done a tremendous job investing in Godiva. Now we’re seeing the benefits of that investment, growing at double-digit rates. So a big thing that I think about all the time is making sure that we have the right infrastructure to support that growth. It could be supply chains; if we’re in China, we have to get the product there. It takes a lot of work to do that.

What metrics do you monitor?
We follow a lot of internal metrics. Obviously, growth is important. On the cost side, we look at our cost per pound and per kilo [of cocoa and finished chocolate]. How much growth is driven by innovation is key. We have been very successful at innovating; about 30% of our growth in sales comes from new products, which are products introduced in the last 18 months.

One great thing about Godiva is that we have strong chef credentials. Our chef chocolatiers follow trends in the chocolate industry, and they’re always looking to introduce new recipes and combinations. So when I talk about innovation, it’s not just about getting the product in a package. It’s all of that expertise.

Emerging Markets

I remember listening to Kenny Rogers sing “The Gambler” growing up in my community.  As many of you know, Rogers is a country artist.  I was well aware that if my friends knew I listened to country music, I would have lost my ‘cool card’ among my rapped-crazed peers.  Today, the lyrics of “The Gambler” still guide my business strategy.

“You got to know when to hold ‘em, know when to fold ‘em
Know when to walk away and know when to run
You never count your money when you’re sittin’ at the table
There’ll be time enough for countin’ when the dealing’s done
Every gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep” 

If most senior leaders would guide themselves with this simple lyric, their organizations would be better off.  For example, you find a good spot in the lake where there are an abundance of fish.  You keep this secret, but then start sharing it with a few friends. Sadly, the word gets out about your special spot.

Finally, you find yourself squeezed out from your favorite spot.  It’s a hot spot now.  The fish are being topped out.  Yet, people continue to fish there despite obtaining less fish and requiring more time to get the same results.  Even though you love the spot and have a sentimental connection with this area, you abandon this location and move to another unknown location that shows plenty of potential.  You moved not because you wanted to move; you moved because you are a fisherman who loves catching fish.

Likewise, today’s businesses are operating abroad in order to catch more fish and obtain more profitability.  U.S. multinational companies, like Coke Cola and McDonalds, realize that America’s market is pretty saturated and riddled with hypercompetitions.

How many more burgers or cokes can Americans continue to consume?  Additionally, companies hope to lower their costs by searching for a lower cost labor force.  Charles Hill, author of International Business, suggests that outsourcing is systematic:  “By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.”[1] Therefore, emerging markets become more attractive.

The fragility of today’s world’s economies demands that businesses act more prudently and decisively about their market strategies. Emerging markets, which were once stigmatized with the name ‘Third World’ markets, will be dominant players in the world’s future economy.

The top four emerging markets include China, Brazil, India, and Russia.  According to Goldman Sach’s projects, these countries will overtake the seven largest industrialized countries (United States, Japan, Germany, France, UK, Italy, and Canada) by 2040.  Antoine va Agtmael, author of The Emerging Markets Century, argues that the prominent role of emerging markets is in future commerce.

He predicts revolutionary changes due to these emerging markets and equates these changes to the second industrial revolution.  Some of the key success factors for these emerging companies are the following: (1) an obsessive focus on quality and design, (2) brand building, (3) logistics, (4) being ahead of competitors in adapting to changing market trends, (5) acquisition savvy, (6) sustaining an edge on competition in information technology, (7) clever niche strategies, and (8) unconventional thinking.[2]

Additionally, these companies have a hunger to compete since their success will improve their way of life. Sadly, many Americans do not understand the level of poverty that motivates these countries. Agtmael further notes: “A new breed of companies will play a critical role in producing this shift; a select number of which truly deserve to be regarded as world class.

In the face of these firms’ vigorous emergence on the world stage, there will be a temptation to go into protective mode….”[3]  However, globalization makes retreating a passive signal of being defeated in a world market.  Therefore, U.S. companies like IBM and Google may see themselves fighting to keep their dominance from unrecognized firms from these emerging countries with a hunger to topple established U.S. businesses.

Discuss how U.S. companies can effectively address the competition from firms located in emerging markets.

[1] International Business by Charles Hills

[2]The Emerging Markets by Antoine va Agtmael

Will U.S. election outcome affect your international expansion plans?

Russia joins the WTO: Now what for U.S.-Russia trade relations?

  • BY: DINA GUSOVSKY, Examiner.com,  September 3rd, 2012
Russia-U.S. trade relations in jeopardy?
Russia-U.S. trade relations in jeopardy?

For months now, American businesses have been warned that if the U.S. does not grant Russia permanent normal trade relations status as Russia officially becomes a member of the World Trade Organization, U.S. companies could lose hundreds of millions of dollars.

Now that Russia has joined the WTO, it is important to consider what effect, if any, the status quo could have on the American economy.

On the Russian side, any economic changes will be gradual.

Russia has not rushed to lower trade tariffs, instead choosing to take a slower course so that its own companies can deal with the changes in due time.

On the American side, Congress has yet to act leaving companies like Deere, General Electric, and Caterpillar, among others, to wonder if their bottom line will suffer as a result of losing out on the Russian market.

Many lawmakers believe that granting Russia permanent normal trade relations would ignore Russia’s human rights violations and support for anti-American governments like that of Syria and Iran.

The recent sentence of the Russian punk band Pussy Riot, which caused an international outcry, did not help matters much either.

To grant Russia that status, Congress must first repeal the antiquated Jackson-Vanik Amendment. Several lawmakers want to replace Jackson-Vanik with the Magnitsky Bill which would only make matters worse in terms of relations between the two nations.

Russia strongly opposes such a bill and has even vowed retaliation.

According to Alexander Gordin, Managing Director of Broad Street Capital Group, who advises businesses on trade with Russia and other former Soviet nations:

…If the Jackson Vanik amendment remains in place, the Russian government would be fully within its rights to discriminate against American suppliers of goods and service, thus putting US companies at a serious disadvantage against their Asian and European competitors who are not faced with such restrictions. Not only will US businesses have difficulty expanding their sales into the Russian markets, but the existing $10 billion US export trade with Russia will also be jeopardized.

And that disadvantage is also likely to translate into the loss of American jobs.

Gordin further points out that:

The consumer market, with 140 million residents, is one of the largest in the world, and the country’s infrastructure needs are projected to top $500 billion in the next five years. An immediate effect will be an estimated tripling of existing exports by US companies into Russia and the ability for many new entrants to begin supplying their goods and services into the Russian market. New exports directly translate into new jobs in the US.

Though the Obama administration has pushed for the repeal of Jackson-Vanik, both Republican and Democratic lawmakers remain divided on whether or not that is a viable option in the context of US-Russia relations as they are today.

Some, however, view an even bigger problem when it comes to fair trade between the two nations.

According to International business and legal consultant, Edward Mermelstein,

While Jackson Vanik will continue to hinder investment between the US and Russia, the bigger obstacle continues to be the mindset of the Russian companies. As long as returns in Russia outpace any similar investments in the US, the incentive to put money in America is lacking. This will slowly change as reduction of risk in Russia follows the adherence to western standards related to legal and accounting practices.

The fact that Russia will now have to adhere to standards set forth by the WTO is inevitable.

But whether or not American businesses will be able to profit from that adherence remains unclear.

http://www.examiner.com/article/russia-joins-the-wto-now-what-for-u-s-russia-trade-relations

Emerging markets: Will technology deliver the promise?

TNW Magazine

By: Tessa Sterkenburg, The NextWeb – September 1, 2012

In 1994 I did research for my thesis at a Philips factory in a so-called Free Trade Zone in Penang, Malaysia. At the time — and maybe still today — local governments gave incentives to multinationals (tax breaks and other favorable conditions) to set up local plants in these Free Trade Zones. The idea was that development would spread itself through the region, as these multinationals would use local suppliers, and these suppliers would need suppliers as well, etc. In this way prosperity would spread, and the new emerging markets, the East-Asian “Tigers” were born.

I certainly had a great time at the beautiful Penang Island but the outcome of my research was a bit depressing: the “local” subcontractors turned out to be other multinationals, and when conditions became more favorable in China, the whole factory, including its suppliers, and their suppliers relocated. Of course, there was some progress in the region through talent development and local schooling, but probably not to the extent the Malaysian government had hoped for.

With technology and the Internet as major drivers for economic growth, I suspect that the dynamics are very different today. The fastest-growing companies are now growing at a much quicker rate than the fastest-growing companies twenty years ago. Local presence is a lot less important. Initial startup costs for corporations are much lower. People don’t have to be located in one place to work together (in theory). The world can be reached through the Internet. All you need is a good idea and a bit of tenacity, right?

On the other hand: the current most successful technology companies in the world, Apple, Amazon, Facebook and Google, are all from the US.

According to Wikipedia, the eight largest emerging and developing economies by either nominal GDP or GDP (PPP) are China, Brazil, Russia, India, Mexico, South Korea, Indonesia, and Turkey. The four biggest and fastest growing emerging markets are the so called BRIC countries (Brazil, Russia, India, and China). Jim O’Neill from Goldman Sachs, who coined the term BRIC in 2001, argues that the economic potential of these countries is such that they could become among the four most dominant economies by the year 2050.

What is the role of technology in this? Will the next successful technology companies come from these countries? Will technological dominance be spread more evenly and what are the mechanics behind this?

Let’s hear it from the experts. We asked Brazilian investor Jose Marin; Esther Dyson, an investor, Russia fan and Yandex board member; Werner Vogels, Chief Technology Officer at Amazon; and Frank Yu, founder of Kwestr who moved to China in 2004, to comment on the influence of technology on the BRIC countries.

Brazil

Jose Marin: Founding Partner and Managing Director of IG Expansion. IG Expansion builds new technology and Internet companies in Spain and Latin America. A large number of their current investments are Brazilian companies: AO Viajanet, Shoes4you, 55social, MyAlert. 

Technological potential in Brazil

Brazil represents the largest e-commerce market in Latin America and its online population, 78 million people, is larger than the total population of Spain, France or the UK. E-commerce has been skyrocketing in Brazil. According to Forbes, it had an average growth of 32.5% in the last two years and an expected 26% growth in 2012.

And, according to Jose Marin, there is certainly no lack of ideas in Brazil.

Obstacles

However, there are some barriers that make technology innovation less successful than in developed markets.

1. It is very hard to raise capital for startups locally. Some foreign business angels and large VC funds (mainly from the US) are becoming active in the country, but they are still learning about the market and things go slowly.

2. Human capital is an issue. There is a qualified workforce in Brazil’s IT sector. This is key for innovation, but IT professionals are becoming more and more expensive. The Brazilian government is making an effort in this area, with significant investments in technical schools and universities.

3. The financial culture of local investors has no “technology DNA” yet. We need more successful entrepreneurs and relevant exits to push investments in this space and educate investors from other sectors to follow them. It is very difficult to compete in innovation when investment in R&D is low.

Brazil invested 1.2% of the GDP in R&D in 2010. This percentage is below the level recommended by OECD (2.5%), and the rate invested in countries such as the US (2.8%), South Korea (3.3%) and even China (1.5%).

The influence of technology on development in Brazil

The government should stimulate private investment in innovation. In South Korea, 2.25% of the 3.3% of the GDP invested in innovation comes from the private sector. In Brazil, most investments come from the government.

In 2011, venture capital funds invested some $30 billion in companies in the USA — that’s US$100 per person in the country that year. In Israel $1.9 billion was invested during the same year (US$400 per person). This ratio is 10 times that of Brazil’s: VC investment during 2011 reached US$8 billion according to LAVCA* — an improvement at 27% higher than the previous year, but still only US$40 per person.

Brazil is a country of opportunities and there is a lot of work to do. But we need more time, education of local investors, successful exits, and support from the government to promote technology development.

* Latam Association of Venture Capital

Russia

Esther Dyson is a former journalist, Wall Street technology analyst, angel investor, entrepreneur. She’s a lifelong Russia fan who’s fluent in the language and on the boards of several Russian technology companies including AO Yandex, Russia’s largest search company.

Technological potential of Russia

What is the technological potential of Russia and could the new Google or Amazon emerge from Russia?

Dyson: Actually, you could argue that the old Google did emerge in this country: search-engine company Yandex started about a year before Google. But unlike Google, it lacked a huge domestic market, so it now trails the US company in size though it remains one of the world’s top-three search companies.

Obstacles

The biggest obstacle to becoming a world player in Russia are two-fold. One is the lack of a large, competitive domestic market, though that is now changing as Russia has become the largest Internet market in Europe.

The second is the relative immaturity of Russia’s business culture; although there is huge technical talent, which you can be born with, few people have management and business skills, which are best learned through experience and through working with good managers. To some extent you can see this now in Silicon Valley. It’s easy to build an app, but hard to build a company around the app — which is why so many startups are getting acquired.

Of course there are the usual issues around bureaucracy and the like, but those are minor compared to the first two.

In the future, however, Dyson expects to see more and more world players emerging from Russia, which has not only technical talent but imagination and creativity.

The influence of technology on development in Russia

Technology – and more specifically, information technology — is beginning to have a strong influence on Russian economic development.  It brings three things into the economy: efficiency, transparency and a change in the balance of power between individuals and large institutions. The first two are fairly obvious; the third is worth explaining.

It is much easier to operate as an independent individual or a small company in the age of the Internet. In the past, economies of scale gave power to big institutions; now, smaller entities or individuals can acquire information and reach markets almost as efficiently (for their size) as large outfits. For many people, a computer is capital equipment that enables them to be productive and to control their own lives.

Similarly, the Internet allows individuals to be “present” online outside their own physical presence. That gives them the ability to write their own history without the need for an institution. That changed the balance of power, and its psychological impact on people’s sense of self is a key factor in Russia’s future development.

India

Werner Vogels is the Vice President and CTO of Amazon. Amazon has presences across three locations in India: Bangalore, Chennai and Hyderabad. Vogels visits regularly. 

The technological potential of India

The potential of India is unlimited. There is a great entrepreneurial spirit combined with an excellent engineering education system. You can see that already in the breadth of young businesses that are becoming very successful, from Bollywood streaming companies such as Hungama to Indian travel business disruptors such as Redbus and MakeMyTrip; from Classle which brings online education to rural areas to more traditional businesses such as Druva which does enterprise backup and archiving.

Obstacles

India’s biggest challenge is to make sure that they keep the talent they have or motivate the talent that went to study abroad to return to India. We are slowly seeing a shift with the rise of Indian companies making it more attractive to build a career in India.

The influence of technology on development in India

Werner believes that the combination of open-source software and cloud computing is enabling a whole new generation of Indian entrepreneurs to be successful, not only in India but around the world. Redbus is now expanding into Asia and Hotelogix is growing big in South America. Next to the big outsourcing firms in India a whole range of young, new technology companies are growing that are social and cloud focused. One example is Kuliza, a company that enables other enterprises around the world to grow.

China

Frank Yu is the CEO and co-founder of Kwestr. Frank was born in the US and moved to China in 2004.

Technological potential of China

Frank Yu: I don’t think the next Google or Amazon will come out of China, but I do think that maybe the next Oracle or even GE has the potential to come out of China. These tech giants are not known for innovation but are known for their ability to deliver service and products to the public that though not groundbreaking, have their own reputation of usefulness and consistency. China is strong in fine-tuning processes, not in groundbreaking technology… yet.

Obstacles

Education and mentorship are the biggest problems. The Chinese educational system is geared for volume and not quality. Skills important for a knowledge economy such as critical thinking, risk-taking and conceptual meta-thinking just don’t get taught in the universities well. There are many smart people in China but without the proper nurturing, these talents are wasted. The chain of mentorship the US and European tech industry takes for granted is not developed here because its all relatively recent. The command and control style of Chinese management which trickles down into their mentorship and leadership style doesn’t help.

The influence of technology on development in China

Chinese developers are naturally agile. Natural prototypers, they work fast and dirty to get something to work. China is leapfrogging into the information age — it has had an industrial phase but it has also gone from an agricultural society into an information society in less than three decades. China will be a tech leader as a manufacturer, but not as an innovator.

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