How GE and IBM are Playing Global Development to Win

by Jonathan Berman, HBR BLOG

Most big corporations follow global development trends. Where there is economic growth, there is opportunity, and the companies that can predict where growth will take place are better positioned to take advantage of it. That is the reactive approach to economic development.

In the last few years, a more powerful dynamic has gained traction. CEOs are proactively engaging with emerging market government to spur economic development and create opportunities for their companies. In the fast growth markets of Asia, Africa and Latin America, national governments are responding to a more empowered citizenship, and looking for corporate partners to achieve their development goals. Companies that fill that need effectively are doing more than reacting to development. They are playing development to win.

General Electric is a good example. Four years ago, GE initiated a strategy to compete more effectively in Africa, one of the fastest growing regions in the world in terms of GDP. GE did more than take advantage of growth as it came. The company’s leadership moved proactively to accelerate it and shape it. “If we see a country where reward outweighs the risk, we want to invest,” CEO Jeff Immelt says in Success in Africa. GE spent months understanding the development priorities of countries where it planned to invest. Partnering with those governments, the company sought out discussions at the ministerial and head-of-state level to identify and work on the country’s most significant infrastructure challenges. The results are encapsulated in a “Country-Company MOU,” which describe key challenges the country faces and the role GE will play in helping meet them. For example, the two parties identified the challenge of national electrification and committed to work together to bring $10 billion of investment and 10,000 megawatts of new power online, along with local manufacturing and training. Emerging market infrastructure is a segment many Western companies have ceded to China, but GE is winning contracts because it is playing development to win.

IBM is doing something similar in data analytics. CEO Ginni Rometty took the top job in 2012, and identified Africa as a locus of technological growth early in her tenure. IBM identified a set of “Grand Challenges” facing the continent that could be addressed through superior data analytics, including water and sanitation, energy management, financial services, transportation, public safety, healthcare, and agriculture. Last month, IBM launched a dialogue with the government of Nigeria. It was co-hosted by the Minister of Technology and included ministers from the cabinet charged with meeting the Grand Challenges IBM identified. Rometty, on her second trip to the region in three months, led the session for the company. IBM is speeding the region’s growth, and helping shape its direction. That is playing development to win.

I recently spent some time with Bob Diamond, the former CEO of Barclays. Now head of Atlas Mara, he’s positioning the investment company to play development to win. Earlier this year, they raised $325 million in the public markets and this month acquired BancABC, a bank with operations in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe. “Governments want banks who will lend to businesses and homeowners,” Bob explains, “That’s what we intend to do. The private sector is growing in Africa and we plan to enable that in multiple countries.”

Playing development to win does have costs. It requires an up-front investment of money and time to understand the growth challenges within each host country or region and to establish the government and civil society relationships needed to act on those challenges. It also demands senior management and board involvement. Companies playing development to win have CEOs traveling to the region 2-3 times per year, supported by engagement of the full management team. Furthermore, the returns on investment are long term. For a large company, it’s common to invest for a decade or more before shareholders see material earnings. The anticipated scale of new business has to be large enough to warrant that.

Playing development to win should not be mistaken for corporate social responsibility (CSR). Sustainability and core values support any great company, but expanding long-term earnings by meeting big development challenges takes more. At a company that’s playing development to win, business units are leading the effort, enabled by sales, marketing, finance, supply chain management, CSR, and social investment.

Some might see playing development to win as cynical or undermining the cause of inclusive growth. It’s neither. Cynicism would be to bet against development. The companies playing development to win need the institutions and policies with which they are engaging to yield tangible results. If the government of Nigeria fails to deliver widespread, low-cost power, the fallout for GE will be significant.

Playing development to win will be the hallmark of great companies operating in emerging markets. Over the next decade, they will be the companies addressing the most pressing challenges in countries where the potential for growth is ripe. As a result, they will shape the landscape in which they compete, attract and retain superior talent, build stronger brands and enjoy stronger relationships with customers in the fastest growing global markets.

More blog posts by Jonathan Berman

Crimean Lessons for US Companies Doing Business Abroad

International political disturbances such as current events in Crimea and prior upheavals in, among others, Syria,Venezuela,Thailand, Kyrgyzstan, Egypt, Georgia, Congo, Iran and even Cuba always have profound effect on US businesses operating in the countries involved in those conflicts. Large US companies operating across the world have long learned to foresee and mitigate risks associated with politics, while small and medium-sized businesses (SMEs), not so much. This is at the time when US SME sector has undergone unprecedented international expansion fueled by low dollar exchange rate, reduced costs of telecom and travel, advances of the internet and growing demand for US products and services.

So what can US exporters, contractors, investors and franchisors learn from the Crimean conflict and what steps can they take to protect themselves from the next eruption in a seemingly safe international destination?

DO NOT PANIC!

This is by far the most important lesson. My business and I have survived three full-blown political crises, living through the fourth and have saw many significant government and policy changes, financial melt downs a half-dozen revolutions and a war in countries where we have had permanent operations, or business dealings.

First, protect your employees, corporate property and information. Start implementing contingency plans and have all non-essential personnel leave the country if the State Department issues travel warnings for the country you operate in. Stay in constant touch with the local US Embassy, or US Commercial Service. Analyze and reanalyze the news and information you gather from your private network. Look for signs of permanent shifts, if those are not present odds are any crisis will blow over and things will return to normal and in many cases lead to greater economic prosperity.  Some crises play out in days (Georgian war, GkCHP in Russia in 1991) some like Crimea look like they are long-term game changers and require a more fundamental reaction and adjustment of one’s business to be in sync with the new reality and with the modified US policy.

STAY INFORMED

Develop and cultivate multiple sources of reliable information. During rapidly breaking international events, there is a tremendous amount of white noise and inaccurate information pouring out of multiple sources. Social network posts, experts of various stripes appearing on TV, newspaper and magazine articles all putting their own spin on the events, with many being inaccurate and some just plain fake.  Thus it is important to distill several balanced general news, as well as trade sources to extrapolate accurate and timely information. For instance during Crimean crisis multiple US mainstream news sources were a day late reporting many important developments, so having reputable local sources (often available in English) is important.

Develop an informal network of Embassy and government agency officials, local chambers of commerce (AMCHAM) offices, bilateral councils, legal and financial professionals operating in the countries of interest. Initiate regular information exchanges and analysis sessions with members of your network. Join LinkedIn groups and actively monitor subject discussions. Ask yourself periodically if coverage you are receiving is correct and balanced. Make sure you understands all the issues and perspective of all sides involved in the conflict.

CONTINGENCY PLANNING

What happens if you have an order in route to a foreign country and a conflict arises there? What happens if your buyer is arranging credit and you have ramped up your production when sanctions are imposed? What happens if you, or your employees are in the country during the start of an unrest?  What happens if the ruling party changes during significant contract negotiations? What about a politically motivated change in leadership among your perspective customers, borrowers, and other interested parties?

To minimize your risks, you will want to keep your business, your person, and your information secure. That means at least taking common sense precautions in your daily business operations.  It also means that you have to be absolutely ready to  abandon your entire business in the foreign country at a moment’s notice. In the movie Heat, Robert DeNiro, playing the part of Neil McCauley, defined his survival strategy:  “Don’t let yourself get attached to anything you are not willing to walk out on in 30 seconds flat if you feel the heat around the corner.” A similar strategy should be employed when doing business abroad.

An effective survival strategy must always include contingency plans. These could include getting out of a country in a hurry whether via traditional or alternate routes, implementing a crisis management plan and hiring security, using medical evacuation insurance, or knowing where you can get access to  a few thousand bucks for when your wallet is lost, office ransacked, ATMs cease operating or Visa/Mastercard system is disabled. For exporters who have goods en route, or are n the middle of a contract production, know your rerouting options, alternative markets and formulate your plan in case the force majeure clause of your contract is invoked.

DO NOT SAVE ON LEGAL COSTS and PAPER ALL TRANSACTIONS PROPERLY

Small and mid size businesses generally despise lawyers (well certainly legal costs) and temptation is often to cut corners, re-use standardized contracts, distribution agreements and not go through with full legalization of property and asset acquisition in country. Often owners wish to remain hidden and transactions are done through intermediaries and sometime with “tax optimized” funds. BIG mistake. What will you do if a country has change of government, or worse yet the place where your company does business become’s another country (Crimea is just one of many examples of such transformations over the last 25 years.)  Use reputable lawyers both in the US and locally. Spend a bit extra upfront and have a piece of mind later on.

BUY INSURANCE!

In addition to commonly used freight insurance used by exporters, three specialized kinds of insurance are available to protect US companies and their employees venturing abroad:

Political risk insurance (PRI) – covers investors from such perils as political upheaval, currency inconvertibility and expropriation, creeping expropriation or nationalization of their assets. This type insurance also protects franchisors from loss of their royalty streams and protects contractors who are building international projects. Many private companies offer PRI, but OPIC – a federal agency tasked with financing and insuring American cos.’ investments abroad offers the most comprehensive and flexible policies for the money. MIGA – a unit of World bank is another potent source of PRI. Coverage is open in about 150 countries and we recommend it to all our clients venturing abroad.

It is important to consider PRI at the very early stages of the planned international investment or franchising process. Underwriting process is similar to that of a traditional loan and takes a few months.

Export credit insurance (ECI) – covers exporters from the risk of non-payment by the foreign buyers whether due from financial or political causes. It allows exporters to vastly expand their intentional business by offering open account sales with terms of up to 180 days. ECI policies range from an umbrella type of insurance covering multiple buyers to an individually tailored, albeit more expensive, single buyer coverage. Underwriting for ECI policies depends on the size of the proposed transactions and usually takes 1-2 weeks. ECI is offered through a number of private insurance carries and through the Export Import Bank of The United States (US Ex-Im).

Travel Medical Insurance (TMI) – covers business travelers against illness or injuries while traveling abroad. This type of coverage either permits subsidized or free treatment at authorized local doctors and hospitals, or when needed, allows for MEDEVAC evacuation to safe jurisdictions in case of serious injury

Fluent In Foreign Academy puts a series of bi-weekly educational webinars on selecting the right PRI, TMI and ECI solutions. To register for the upcoming sessions, please complete the form below:

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International business is often very profitable and exciting, but events like the Crimean crisis remind of the perils and should force each and every one of us doing business abroad to reassess and augment our risk mitigation strategies and procedures.

Please email me with any questions you may have about making your company better prepared to deal with international crises – agordin@broadstreetcap.com

2013 Fi3E INDEX™ RANKS APPEAL OF 180 NATIONS FOR U.S. EXPORT OPPORTUNITIES

           

NEW YORK, NY—April 4, 2013  — Fi3E™, an annual proprietary and forward-looking index that measures the relative attractiveness of 180 nations to companies looking to export goods and services abroad, is being introduced today by Fluent in Foreign™ LLC, a New York City advisory group that guides companies as they seek to establish or expand their business beyond U.S. borders.

The Fi3E Export Country Appeal Index™ is the third and final index to be introduced.  All three indexes are designed to help companies do business abroad. The Fi3F™ index, for franchisors, launched in February and Fluent in Foreign Business  Fi3I™, geared for companies and individuals looking to make direct investments abroad, will be released next month.

China again ranks as the country that’s most appealing for exporters, followed by Australia, Poland, South Korea, Turkey, Canada, Singapore, Thailand, Malaysia and Mexico. To obtain the rankings of all 180 countries, visit www.academy.fluentinforeign.com .

“There are enormous opportunities for companies both large and small, to sell goods and services overseas,” said Alexander Gordin, Managing Director of Fluent In Foreign Business and Author of the eponymous book.  “Export opportunities presents new places to sell products, which translates to the creation of more jobs.  President Obama’s National Export Initiative has served as a catalyst to spur job growth and a resurgence of manufacturing activity through exports.  More needs to be done, and companies should focus on exports as a fundamental part of their business activities, rather than an afterthought when the economy slows down at home.”

The Fi3E Export Country Appeal Index™ uses proven factors to evaluate each country, with proprietary data combined with information from the World Bank, the United Nations, Transparency International and the International Monetary Fund. The index also looks at influencing factors including each country’s GDP growth, population, availability of export credit insurance and financing, corruption, ease of exporting, protection and the legal framework for contract enforcement.

“The Fi3E Index serves as a significant reference tool for businesses and investors looking abroad for export markets and opportunities,” Alexander Gordin said.  “It will save countless hours of preparation and research, and it offers important cautionary signs where appropriate.”

Fluent in Foreign Business  is a unique advisory and information platform designed to help direct investors, franchisors and exporters enter foreign markets or expand existing international operations and assist clients doing business with new countries and governments. Services include financing, political risk insurance, legal compliance and strategic business development.

For more information confact agordin@fluentinforeign.com or  +1 212-490-4323.

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Brics Nations Take Steps on Currency Trade, Bank

Brazil and China Set Currency Swap, but Bloc’s Idea for Development Bank Encounters Some Obstacles

By PATRICK MCGROARTY in Durban and DEVON MAYLIE in Pretoria, The Wall Street Journal

ReutersSouth Africa’s first lady Bongi Ngema toasts China’s first lady Peng Liyuan as President Jacob Zuma looks on.

Members of the Brics group of emerging markets took steps to trade their currencies more freely and to establish a joint development bank, seeking to counter the influence that developed countries exert over the global economy.

Brazil and China agreed Tuesday at a summit of Brics leaders in Durban, South Africa, to use their central banks to swap up to $30 billion in Brazilian real and Chinese yuan over the next three years, allowing businesses to trade between the two countries without converting earnings and investments to U.S. dollars, the standard conduit of global trade.

Brazil’s finance minister, Guido Mantega, said the arrangement, which the countries have been working toward since this past June, would give them a means to exchange currencies “independent of the conditions of financial markets.” He also said the Brics countries—Brazil, Russia, India, China and South Africa—were close to an agreement to pool some foreign-currency reserves in case of a balance-of-payments crisis.

The bloc’s move to create a new development bank, however, was weighed down by disagreements over funding and management, said Russian Finance Minister Anton Siluanov. “On the whole, we agreed that we will continue to work on creating a Brics bank once the unresolved questions are answered,” the Interfax news agency quoted Mr. Siluanov as saying.

South Africa’s finance minister, Pravin Gordhan, added that he was pleased with the negotiations. “We’re on track,” he said.

South African officials want a new development bank to fund infrastructure projects that the International Monetary Fund and the World Bank have overlooked. Larger Brics members, such as China and India, are eager to establish an institution that could extend their influence deeper into Africa and other emerging markets where their economic interests are expanding.

The Brics’ slow march toward establishing their own bank illustrates their struggle to move past populist rhetoric to true cooperation between powerful and sometimes adversarial nations. Each is eager to reap the benefits of a larger trade group—and all are fearful of being flooded with products from the others, particularly China.

“What we now seek to address jointly is to find the means towards a more equitable balance of trade,” South Africa’s President Jacob Zuma told reporters in South Africa’s capital, Pretoria, after meeting with China’s President Xi Jinping. “Africa is counting on the People’s Republic of China for support in the continent’s development.”

Mr. Xi acknowledged China is pursuing its own commercial interests in Africa. “We each see the other side as an opportunity for our own development,” he said.

According to the proposals discussed Tuesday, each country would likely contribute up to $10 billion to the bank, an official said, speaking before plans were to be approved by the national leaders gathering Wednesday. The bank would focus on infrastructure development, he said, both in the five-nation group and in emerging markets where they want to do business.

But economists and business leaders said an initial pool of $50 billion wouldn’t be enough for the bank to make its mark in Africa or elsewhere.

“At this point it’s somewhat symbolic,” said Anthony Thunström, chief operating officer for accounting firm KPMG LLP‘s Africa investment program. “Its potential will only be realized when it’s better capitalized, and I think that’s going to be a longer-term project.”

More specific decisions—including which country will host the bank and where it will invest—will be postponed at least until the bloc’s next summit meeting in Brazil in 2014, he said.

“There is general agreement that there is a need for this,” said the official involved in the negotiations. “Creating a multilateral institution takes quite a long time from being an idea to being set up.”

 

BRICS Nations Plan New Bank to Bypass World Bank, IMF

By Mike Cohen & Ilya Arkhipov –  Bloomberg.com

Tomohiro Ohsumi/Bloomberg

The leaders of the so-called BRICS nations — Brazil, Russia, India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that starts today in the eastern South African city of Durban.

The biggest emerging markets are uniting to tackle under-development and currency volatility with plans to set up institutions that encroach on the roles of the World Bank and International Monetary Fund.

The leaders of the so-called BRICS nations — Brazil, Russia,India, China and South Africa — are set to approve the establishment of a new development bank during an annual summit that began today in the eastern South African city of Durban, officials from all five nations say. They will also discuss pooling foreign-currency reserves to ward off balance of payments or currency crises.“The deepest rationale for the BRICS is almost certainly the creation of new Bretton Woods-type institutions that are inclined toward the developing world,” Martyn Davies, chief executive officer of Johannesburg-based Frontier Advisory, which provides research on emerging markets, said in a phone interview. “There’s a shift in power from the traditional to the emerging world. There is a lot of geo-political concern about this shift in the western world.”

The BRICS nations, which have combined foreign-currency reserves of $4.4 trillion and account for 43 percent of the world’s population, are seeking greater sway in global finance to match their rising economic power. They have called for an overhaul of management of the World Bank and IMF, which were created in Bretton Woods, New Hampshire, in 1944, and oppose the practice of their respective presidents being drawn from the U.S. and Europe.

Reform Needed

“We need to change the way business is conducted in the international financial institutions,” South African International Relations Minister Maite Nkoana-Mashabane said in a March 15 speech in Johannesburg. “They need to be reformed.”

The U.S. has failed to ratify a 2010 agreement to give more sway to emerging markets at the IMF, while it secured Jim Yong Kim, an American, as head of the World Bank last year over candidates from Nigeria and Colombia.

Finance ministers and central bank governors from the BRICS nations, who met in Durban today, agreed to set up currency crisis fund of about $100 billion, Brazilian Finance Minister Guido Mantega told reporters today. He didn’t give details of proposed funding for the new bank, which Brazil wants established by 2014. The nation’s leaders are due to sign a final accord tomorrow.

FDI Inflows

Goldman Sachs Asset Management Chairman Jim O’Neillcoined the BRIC term in 2001 to describe the four emerging powers he estimated would equal the U.S. in joint economic output by 2020. Brazil, Russia, India and China held their first summit four years ago and invited South Africa to join their ranks in December 2010.

Trade within the group surged to $282 billion last year from $27 billion in 2002 and may reach $500 billion by 2015, according to data from Brazil’s government. Foreign direct investment into BRICS nations reached $263 billion last year, accounting for 20 percent of global FDI flows, up from 6 percent in 2000, the United Nations Conference on Trade and Development said on its website yesterday.

“If they announce a BRICS bank it will be quite something,” O’Neill said in an e-mailed reply to questions on March 15. “At a minimum it symbolizes they can achieve something as political group and means lots of other things could follow in the future. It also means that they will have their own kind of special World Bank, which may aid infrastructure and trade projects.”

Currency Pool

While BRICS leaders may approve the creation of a development bank in principle at the summit, details on funding and operations may take longer to finalize.

Russia favors capping each side’s initial contribution at $10 billion, Mikhail Margelov, PresidentVladimir Putin’s envoy to Africa he said in a March 15 interview in Moscow.

“It will be some time before it will be feasible for this bank to start financing say, a railway project,” Simon Freemantle, an analyst at Standard Bank Group Ltd., Africa’s biggest lender, told reporters in Durban yesterday. “That is some way out.”

Interest rates near zero in the U.S., Japan and Europe have fueled foreign investors’ appetite for higher-yielding assets, driving up currencies from Brazil to Turkey. Brazil has warned of a global currency war as nations take reciprocal action to weaken their currencies and protect export industries.

African Leaders

Brazil’s real has gained 1.9 percent against the dollar since the beginning of the year, while South Africa’s rand has dropped 8.7 percent in the period.

For South Africa, which makes up just 2.5 percent of total gross domestic product in BRICS, the summit is a way to showcase its role as an investment gateway to Africa. President Jacob Zuma has invited 15 African heads of state, including Egypt’s Mohamed Mursi and Ethiopia’s Hailemariam Desalegn, for talks with the BRICS leaders at the summit. For most of the BRICS leaders, it’s also the first opportunity to meet Chinese President Xi Jinping after his appointment on March 17.

“We will discuss ways to revive global growth and ensure macroeconomic stability, as well as mechanisms and measures to promote investment in infrastructure and sustainable development,” Indian Prime Minister Manmohan Singh said in a statement yesterday.

To contact the reporters on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net; Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net

Related articles

• BRICS to approve new bank to replace IMF: report (marketwatch.com)
• BRICS Summit: Creating New Development Bank to Rival World Bank (goldenageofgaia.com)

CHINA PLAYS BY ITS OWN RULES WHILE GOING GLOBAL

By JACK CHANG, AP

MEXICO CITY (AP) — When Venezuela seized billions of dollars in assets from Exxon Mobil and other foreign companies, Chinese state banks and investors didn’t blink. Over the past five years they have loaned Venezuela more than $35 billion.

Elsewhere around the Caribbean, as hotels were struggling to stay afloat in the global economic slowdown, the Chinese response was to bankroll the biggest resort under construction in the Western Hemisphere — a massive hotel, condominium and casino complex in the Bahamas just a few miles from half-empty resorts.

All over the world, from Latin America to the South Pacific, a cash-flush China is funding projects that others won’t, seemingly less concerned by the conventional wisdom of credit ratings and institutions such as the World Bank.

• In this July 14, 2012 photo, train tracks cross a farm near Pergamino, Argentina. China agreed to cooperate in financing the modernization of the Belgrano Cargas railway, which connects Argentina capital Buenos Aires with 13 of Argentina’s 23 provinces, including the main soybean producing areas in the north of the country. China is a leading buyer of Argentine soybeans. China has emerged in recent years as the largest provider of development loans to Argentina, Venezuela and Ecuador, according to the Gallagher report. (AP Photo/Natacha Pisarenko)

  

• This Jan. 12, 2013 photo released by Baha Mar shows construction of the Baha Mar resort on the beach on New Providence island, Bahamas. For commercial projects such as the Bahamas resort, China is filling a gap left by western investors and bankers retrenching after the 2008 financial crisis. (AP Photo/Baha Mar, Jeong Ku Hwang)

• 

• FILE – In this Oct. 28, 2008 file photo, a man walks past a satellite dish station in El Sombrero, Venezuela. The Venezuelan government said a satellite developed and launched in China for Venezuela will guarantee the South American country’s autonomy in telecommunications. Chinese money is breathing life into government infrastructure projects that otherwise might have died for lack of financing. (AP Photo/Howard Yanes, File)

The Chinese money is breathing life into government infrastructure projects that otherwise might have died for lack of financing. For commercial projects such as the Caribbean resort, China is filling a gap left by Western investors retrenching after the 2008 financial crisis.

But some in the Bahamas worry what will happen if the sprawling Baha Mar project fails. They picture an economy saturated with hotels, dragged down by an expensive Chinese white elephant. Likewise, the infrastructure loans are loading financially shaky countries with more debt and letting them avoid economic reforms that other lenders would likely have demanded.

“The Chinese play by other rules,” said Kevin Gallagher, a Boston University international relations professor who has studied Chinese lending to Latin America. “We’ll give you financing with no conditions, and we’ll finance things the International Monetary Fund won’t fund, things others won’t fund anymore, like big infrastructure projects. It allows countries to shop around, which has good and bad sides.”

Venezuelan leader Hugo Chavez talked up his independence last year while highlighting another $4 billion in Chinese loans, part of a wave of money that has translated into new railways, utilities and other projects.

“In a few days, they’re going to deposit 4 billion little dollars more from Beijing,” Chavez told reporters, holding up four fingers for emphasis.

“Fortunately, we don’t depend on the dreadful bank. What’s that one called that you mentioned? The World Bank. Poor are those countries that depend on the World Bank, the International Monetary Fund.”

Venezuela’s Oil and Mining Minister Rafael Ramirez says China has loaned his country $36 billion since 2008, and others put the figure even higher. The Spanish-language version of a report co-authored by Gallagher, “The New Banks in Town: Chinese Finance in Latin America,” estimates it at $46.5 billion.

The loans have added to Venezuela’s $95.7 billion in public foreign debt as of mid-2012, which has risen even as the country rakes in record-high oil revenue. Some analysts say the spending helped Chavez win re-election in October, despite battling cancer.

China has emerged in recent years as the largest provider of development loans not only to Venezuela but also to Ecuador and Argentina, according to the Gallagher report. All three are junk bond countries, ratings agencies say. In contrast, the World Bank and Inter-American Development Bank remain larger lenders in Brazil and Mexico, both countries with higher bond ratings.

In cases such as the tiny South Pacific islands of Tonga, China is lending enormous sums to countries few expect will be able to repay.

What has surely given the Chinese banks courage is the trillions of dollars in reserves the country holds in U.S. Treasury bonds, investments that pay almost nothing in interest. Making that money work harder for a return overseas has become nothing less than a national priority, part of China’s trumpeted “going out” strategy.

___

China’s economy is the second largest after the U.S., and many of the deals stipulate repayment in oil and natural gas, locking in the commodities China will need to sustain its growth for decades to come.

In 2009 and 2010 alone, the China Development Bank extended $65 billion in such loans to energy companies and government entities from Ecuador to Russia and Turkmenistan, according to a report by Erica Downs, a China expert at the Brookings Institution, a U.S. think tank.

“If you’re lending tens of billions of dollars to a borrower …, you want to make sure that loan is secured against something,” she said. “In the case of Venezuela, it’s the most valuable thing they can offer. It’s just one way to ensure they get paid.”

In dozens of cases, the Chinese have also demanded that their own companies build the infrastructure that will help governments extract and ship the commodities used to pay back the loans. In Argentina, that means agreements to bring in Chinese companies to revamp the country’s decrepit rail system, which would speed up shipments of soy to Chinese consumers.

“The money goes from one account in the China Development Bank into the hands of small- and medium-sized businesses in China,” Gallagher said, while noting the majority involve big state companies.

The Chinese also hold a valuable trump card: They’re betting that Chavez and other financial pariahs won’t dare alienate their last source of affordable money by defaulting on Chinese loans or seizing Chinese assets.

“The Chinese have the upper hand,” Downs said. “The China Development Bank sees this country that’s thumbed their nose at the IMF. And if they borrowed from the IMF and had to be subjected to IMF conditionality, the regime would fall.”

Perhaps with that in mind, more than 30 Chinese consultants toured Venezuela in 2011 and handed Chavez a thick binder with recommendations on everything from exchange rate reform to agriculture.

While news cameras clicked, Chavez held up the book, thanked his Chinese benefactors and pledged to study the prescriptions. Unlike IMF loans, however, the Chinese recommendations weren’t a requirement, and Chavez has shown no sign of curbing public spending.

The investments and loans have contributed to a substantial shift in commerce toward China. Venezuela, for example, saw its trade with the U.S. drop from 26 percent of its GDP in 2006 to 18 percent in 2011, according to an Associated Press analysis of IMF databases. Meanwhile, Chinese trade grew from virtually nothing in 2001 to nearly 6 percent a decade later, much of it in the form of oil to repay loans.

But the money doesn’t necessarily save countries from their own bad financial bets.

Zimbabwe, which has received generous Chinese financing, saw inflation peak at 79.6 billion percent a month in November 2008. At one point, a loaf of bread reportedly cost 500 million Zimbabwe dollars. Gideon Gono, governor of the Reserve Bank of Zimbabwe, suggested one possible remedy: Adopt the Chinese yuan as the official currency. (Zimbabwe eventually overcame the crisis by switching to a mix of Western and African currencies.)

Argentina is fighting off an economic reckoning despite receiving more than $12 billion in Chinese loans, according to the Gallagher report. In 2001, the country defaulted on some $100 billion in loans. It struck a deal with most of its lenders, but over the past year, a group of creditors is insisting on payment in full.

“It’s extremely concerning,” said Margaret Meyers, a China expert at the U.S. think tank the Inter-American Dialogue. “Chinese financing won’t be able to sustain these economies unless they go through substantial macroeconomic reforms. For Argentina, that means open markets, reforming institutions, reforming the banking system, fiscal accountability, ending lots of misspending.”

Some in the borrowing countries have watched with worry as the Chinese bets play out.

Opposition politicians in Venezuela have slammed the deals for locking in contracts for everything from Chinese-made refrigerators to Chinese construction workers while giving Chavez free rein to spend billions of dollars.

“There’s no doubt we’re going to need China, they are an economic powerhouse,” opposition leader Henrique Capriles said last year. “But many of the agreements the government has signed involve political loyalties that don’t interest us.”

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On the beaches of New Providence in the Bahamas, hundreds of Chinese construction workers are toiling around the clock to ready the Baha Mar project for a scheduled grand opening in late 2014.

The project will add thousands of hotel rooms not far from the islands’ biggest resort, the Atlantis.

“Going forward, we have to achieve a sustainable tourism product,” said James Smith, the former state minister of finance for the Bahamas. “If we don’t, Baha Mar could be cannibalizing Atlantis.”

Baha Mar has opened sales offices all over Asia to promote and presell hundreds of pricey condos, hoping to imprint new travel habits on a continent that’s traditionally spent beach vacations in Southeast Asia. It is also working with the Bahamian government to open more consular offices in China to issue visas.

“In general, you would assume that a project of that size is generating its own demand and the idea would probably also be with Chinese money comes an influx of Chinese travelers,” said Jan Freitag, senior vice president of hospitality industry research firm STR. “The Chinese would argue that we can maybe attract a clientele that has not been with you before.”

When completed, the complex is set to boast brands such as the Grand Hyatt, Rosewood and Mondrian, and 313 $1-million condos being marketed to the international elite.

Business leaders have openly questioned the investment as Baha Mar rises just blocks from storefronts left empty during the latest downturn. The Wyndham hotel was closed for all of September and most of October because of low occupancy levels, and on Feb. 8 announced the need for “substantial cutbacks,” including layoffs.

“In a vibrant economy, we wouldn’t be having any concerns. The reason it comes into question is whether it’s right at this time,” said Winston Rolle, CEO of the Bahamas’ Chamber of Commerce.

The project had, in fact, been conceived in a different moment, more than six years ago, when the U.S. housing boom and global tourism seemed unstoppable.

One of the original developers, Caesar’s Entertainment Corp., formerly Harrah’s Entertainment, backed out of the project in 2008, and Chinese financiers stepped in after reaching a deal with project CEO Sarkis Izmirlian. The agreement brought in a state-owned Chinese construction company to build the resort.

“This project is essential to developing business in the Caribbean and into the U.S.,” said Tiger Wu, vice president of the construction company, to Bahamian media. “It’s only the beginning.”

All evidence indicates the Chinese are charging forward. They’ve made their $3.5 billion gamble in the Bahamas. Elsewhere, they’ve promised tens of billions of dollars for everything from dams to railroads. Guyana has hired the state-owned Shanghai Construction Group to build a 197-room Marriott Hotel on the southern edge of the Caribbean.

Meanwhile, traditional investors in the U.S. and Europe have been left on the sidelines. It’s China’s game now. And the rest of the world is waiting to see how the big gambles pay off.

___

Associated Press writers Jeff Todd in Nassau, Bahamas; Ian James in Caracas, Venezuela; Ben Fox in San Juan, Puerto Rico; Michael Warren in Buenos Aires, Argentina; and Nick Perry in Wellington, New Zealand, contributed to this report.

EDITOR’S NOTE _ This story is part of “China’s Reach,” a project tracking China’s influence on its trading partners over three decades and exploring how that is changing business, politics and daily life. Keep up with AP’s reporting on China’s Reach, and join the conversation about it, using the hashtag (hash)APChinaReach on Twitter.

Lost Opportunities: Why US Export Culture Needs to Change

11/17/2012  The GPRA Group Blog

In 2011 the US led the world in exports selling close to $2.2 trillion in goods and services.   Yet, measured as a percent of GDP, the US ranks fourth from last resulting in substantial opportunity losses for SME’s. US firms can do much better, benefitting both themselves and the US economy, but to get there they will need to overcome a history of resistance to cross-border trade. 
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In real terms the 2011 US export numbers look impressive.  Exports of goods and services grew year over year by more than 14.5 percent reaching a record $2.2 trillion – a far cry from the negative growth experienced in 2009 when exports totaled just $1.06 trillion.However, measured as a percent of GDP, the US ranks 189 out of 193 nations.  According to the World Bank, US exports for 2011 were about 13% of GDP approximately on par with Pakistan, Ethiopia and Brazil.  By comparison, China’s exports were 31% and Germany’s were 50%.

These GDP numbers underscore the magnitude of a lost opportunity.  If the US export ratio only matched the world average of 28%, annual revenues would increase by $300 billion.  In raw terms, that amount would underwrite about 1.2 million new jobs (less those lost by companies shifting operations offshore for cheaper labor).

Unfortunately persuading more US firms to take advantage of international markets remains an uphill battle.  Like exercise, everyone knows it’s a good idea, but it’s still hard to get off the couch.

A distorted perspective

There is a deeply held but flawed belief among a majority of US firms that exporting is simply not worth the trouble.  According to a recent study by Deloitte and the Economist Intelligence Unit that measured sentiment of mid-market executives from across the US, only one-third of the companies contacted had opted to expand beyond US borders.  Resistance comes in a couple of flavors:   (1) there are more than enough opportunities for growth within the US and (2) the returns are too small to justify the risks particularly in emerging markets.

The first point might be valid if US companies could count on a stable domestic economy.  However when that is lacking, as it has been over the past four years, failure to diversify into multiple markets leaves companies more vulnerable to economic instability and restricts growth.

As to the argument that it’s more trouble than it’s worth, emerging markets have never been as attractive to US marketers as they are now.  Since 1990, growth in purchasing power (per capita income) has reached 17% surpassing per capita development in wealthier nations by nearly 7%.   Although there is evidence that the rate of growth in these economies is decelerating (partly intentionally), GDPgrowth in developing markets over the next four years is expected to be 2.5 times greater than in developed markets.

Numerous studies have shown that for both multinationals and SME’s the benefits of cross-border operations substantially outweigh the drawbacks.   One survey of 202 non-financial members of the S&P 500 found that for the majority of companies international growth was a “value accelerator”.

Among the companies where non-US revenue growth was highest, the study showed

• They grew faster (6% per year),
• They showed greater revenue diversification enabling 20% of the companies to not only offset declines in their US businesses but also increase overall revenues.
• They had greater returns particularly among companies that focused on emerging and frontier markets where growth is currently averaging 6-8% per year.
• They were able to improve their return on capital and increase their reinvestment rates.

What can be done to encourage US firms to take greater advantage of global market opportunities?

Rethink the US educational system

US schools place so little emphasis on teaching geography and history that it is hardly a wonder that college graduates have less interest and understanding of the world today than their peers did in 1989.  A study by the Pew Research Center showed that despite the vast amount of foreign news available on the web, only 17% of Americans are tracking European economic news closely and just 12% track the political violence in Syria.  If the US does not restructure its educational system to instill an interest in the world from a very young age, all other efforts to increase US exports are unlikely to have much of an effect.

Expand government support programs

In 2011, the China Ex-Im Bank provided some $300 billion in export financing.  Canada’s equivalent backed up over $90 billion in export loans. The US Ex-Im Bank supported just $32 billion in loans (1.5% of total exports) of which 44% went to three major corporations.  To its credit, the administration launched the National Export Initiative (NEI) in 2010 with the goal of doubling exports by the end of 2014 but trade officials will need to reconsider the scale of these support programs if US SME’s are to compete on a world scale.

Focus on risk mitigation

Global trade will always carry some risks, but there are ways that US companies can mitigate them.

• Think macro when it comes to leveraging regional opportunities.   Establishing a foothold in one country can lead to far more opportunity in neighboring countries than doing so from US-based headquarters.

• Think micro when it comes to identifying niche opportunities, product innovation, marketing and support requirements.  Ride the perception that US- manufactured products are still much admired for their quality.
• Think not just economics but also politics.  Careful macro and micro political planning and data modeling can help anticipate and lessen the likelihood of regulatory change, increase access to free economic zones, manage incidents of forced corruption, ensure supply chain continuity and counter social causes of conflict.
• Hire locally as much as possible from management to labor to consultants.  Advanced training and technology around the world has reduced the need for companies to transplant US nationals to new markets.
• Acquire political and trade risk insurance, but recognize that most political risk is not contractible.  Conducting independent due diligence can offset the chance of confusion or conflict in the event a claim is filed.
• Explore all financing options provided by US agencies.  Incentives have increased and bureaucracy has decreased as the US government has determined to make exporting a central part of the country’s economic growth strategy.

According to the Bureau of Economic Analysis, American manufacturers produced 16 times more in 2010 than in 2000 largely due to the utilization of advanced technologies. When productivity savings are reinvested in new facilities and equipment, US companies can compete effectively with foreign rivals particularly in sectors where the country has a comparative advantage (electronics, information technology, medical equipment, and chemicals, for example).  But more SME’s will have to jettison certain outdated ideas about the challenges of exporting if the potential benefits are to accrue to US workers.

New Zealand Tops Forbes’ List Of The Best Countries For Business

 

Kurt Badenhausen, Forbes.com, 11/14/2012

Americans went to the polls this month to vote in a presidential election that in many ways was a referendum on Barack Obama’s economic and fiscal policies. The United States has emerged from the worst recession since the Great Depression, but economic growth remains weak and unemployment stubbornly high. Another challenge: how its business climate stacks up globally.

 

Brendon O’Hagan/Bloomberg via Getty Images

#1 New Zealand

GDP: $162 billion
GDP per capita: $39,300
Public debt as % of GDP: 36%

The U.S. continues to lose ground against other nations in Forbes’ annual look at the Best Countries for Business. The U.S. placed second in 2009, but it has been in a steady decline since. This year it ranks 12th, down from No. 10 last year. The U.S. trails fellow G-8 countries Canada (No. 5), United Kingdom(No. 10) and Australia (No. 11).

Corporate taxes continue to put a damper on American businesses. Following a tax cut in Japanthis year, the U.S. now has the highest statutory corporate tax rate in the world. The effective rate is much lower thanks to numerous breaks, but owning the highest published rate makes for poor perceptions.

It is not just the rate that hinders the U.S., but also the complexity of the tax code. The typical small or medium-size business requires 175 hours a year to comply with U.S. tax laws, according to the World Bank. Overall the U.S. ranks 55th out of the 141 countries we examined in terms of its tax regime. The world’s biggest economy at $15.1 trillion, it also scores poorly when it comes to trade freedom and monetary freedom.

New Zealand ranks first on our list of the Best Countries for Business, up from No. 2 last year, thanks to a transparent and stable business climate that encourages entrepreneurship. New Zealand is the smallest economy in our top 10 at $162 billion, but it ranks first in four of the 11 metrics we examined, including personal freedom and investor protection, as well as a lack of red tape and corruption.

New Zealand’s economy is closely tied to Australia’s, and both held up better than most during the global financial crisis. The downside to the resilience of its economy is that the New Zealand dollar has appreciated, making the country’s agricultural exports more expensive. The higher prices have helped to push up unemployment to 7.3%—the highest level since 1999.

New Zealand cut its corporate tax rate from 30% to 28% last year and eliminated certain deductions, making the cut fiscally neutral. Investors have prospered, with the country’s benchmark stock index, the NZX 50, up 24% over the past 12 months.

We determined the Best Countries for Business by grading 141 nations on 11 different factors: property rights, innovation, taxes, technology, corruption, freedom (personal, trade and monetary), red tape, investor protection and stock market performance.

Forbes leaned on research and published reports from the following organizations: the Central Intelligence Agency, Freedom House, Heritage Foundation, Property Rights Alliance, Transparency International, World Bank and World Economic Forum.

Ranking second on our list is Denmark, on the strength of its technology, trade freedom and property rights. Its GDP per capita is one of the highest in the world at $59,684 last year, according to the World Bank (America’s was $48,442). Like the U.S., Denmark is struggling to recover from the bursting of its real estate bubble. GDP rose 1.1% last year and contracted 0.4% in the second quarter of 2012. Yet, with its business-friendly climate, the country is poised to rebound stronger than most of Europe.

Hong Kong ranks third. Its economy, highly dependent on international trade and finance, remains one of the most vibrant in the world. Credit one of the world’s lowest tax burdens and a high level of monetary freedom. Hong Kong’s economy grew 5% last year and the unemployment rate is a scant 3.2%.

Singapore comes in at No. 4, ranking in the top 20 in all but one of the 11 metrics we measured. The only thing keeping Singapore from the top spot is a low score on personal freedom, as measured by watchdog organization Freedom House. Singapore’s economy depends heavily on exports, particularly in consumer electronics and IT products. Its trade surplus was 24% of GDP in 2011. The $240 billion economy grew 4.9% last year.

Canada slid from the top of the rankings in 2011 to No. 5 this year, losing ground on innovation and technology. The World Economic Forum’s annual Global Competitiveness Report says Canada is being weighed down by “a less favorable assessment of the quality of its research institutions and the government’s role in promoting innovation through procurement practices.” However Canada remains among the best countries in the world when it comes to trade freedom, investor protection and the ease of starting a new business.

 

Related articles

 

• GOLDMAN: Here’s What Global GDP Will Look Like In 2050 (businessinsider.com)

 

Investors flee Russia despite oil revenue boom

In “Fluent In Foreign Business”, I extensively discuss the need to thoroughly understand the investment climate of chosen foreign markets, as many times booming economic signs mask significant economic, political or social problems.  The article below is a good illustration of how smart money is leaving what on the surface appears to be a terrific and attractive Russian market.

Economic Times

5 JUN, 2011

MOSCOW: The billions of investor dollars fleeing Russia each week offer a stark counterpoint to Moscow’s aspirations of soon becoming a global financial centre linking London with Hong Kong .

The world’s leading oil exporter finds itself in the odd position of being flooded with petrodollars and seeing remarkable ruble strength — two prime conditions for local investment — while also bleeding capital at record rates.

The outflow of investor money abroad reached $30 billion by the end of April to nearly match the 2010 total. The May figure is expected to approach $8 billion and a slowdown is not anticipated for some months.

“It is difficult to give a simple and clear explanation as to why this is happening,” Russian Central Bank chairman Sergei Ignatyev acknowledged.

“But the main reason is a rather unfavourable Russian investment climate.”

Investors may argue that Ignatyev was gilding over a graft problem so blatant it saw Russia rank 154 out of 178 countries on last year’s Transparency International Corruption Index.

The World Bank says Russia is the world’s second-most difficult country in which to get a construction permit while local entrepreneurs often treat law enforcement authorities and the courts as a part of the same system.

“When you talk to investors, that really is one of their biggest points,” said chief UralSib strategist Chris Weafer.

“They say look, the Russians are taking their money out of the country. Why should I come to Russia when the Russians are coming out?”

The real mystery is why this scramble to get out of Russia is getting more frantic at precisely the moment when the government is pursuing one of its most market-friendly programmes in years.

President Dmitry Medvedev is now courting Westerners with a $10 billion joint investment fund and hoping to put meat on the bones of his modernisation effort by dislodging state appointees from their seats on company boards.

Both measures fold into a broader $60 billion privatisation programme aimed at giving Moscow its coveted status of being a centre of global finance.

Uncertainty over whether Medvedev or his mentor and predecessor, Prime Minister Vladimir Putin will head the Kremlin next year, may be one of the factors behind investors’ latest spell of jitters.

But analysts note that Putin’s return has been rumoured since the final day of his second term in 2008 and can hardly explain why the outflow of currency has nearly tripled in recent months.

There are other more technical factors also at play.

Russia’s inflation expectations are rising and squeezing holders of local currency bonds. But the help these investors have been getting from a stronger ruble will expire once oil prices climb off their recent highs.

“I think most of the capital flight is associated with this,” said Renaissance Capital economist Ovanes Oganisyan in reference to ruble bond sales.

Other factors may be the record dividends — sometimes as much as 90 percent of profits — paid by such local giants as the British joint venture TNK-BP.

But analysts say that behind all these immediate variables is buried a more fundamental investor doubt about Russia as a future growth market.

The government is gradually raising tax rates on energy producers to cover the tens of billions of dollars in outlays it has promised ahead of the approaching elections.

Manufacturing growth slowed to just above stagnation level last month while Gross Domestic Product growth has barely reached half the rate seen before the global slump in 2008.

“People are starting to realise that the levels of growth we have seen in the past decade are not sustainable without major reforms and major investment,” UralSib’s Weafer said.

An Oliver Wyman financial service partner who recently compared Moscow to other financial centres, showed the Russian capital ranking behind cities such as Manila and Jakarta.

The survey recommended “strengthening regulatory requirements and oversight, improving disclosure … and modernising corporate governance standards,” the agency’s Robert Maciejko wrote in the Wall Street Journal.

“In the absence of efforts on the part of the Russian government to reduce the risks of investments in Russia, one can hardly expect private capital inflows into the country,” the Gaidar Institute said in an annual report.

Analysts said the only silver lining was that capital flight was putting the breaks on runaway ruble appreciation.

“This is a comfortable situation for the government — they like the fact that something is keeping the ruble from gaining too much,” said Oganisyan.