Political risk and Business Environment in Emerging Markets: Implications and Perceptions for the Strategic Management of the Spanish Companies IMBA Master Thesis Moscow 2012 Davinia Capote Navarro
Introduction ContextResearch motivation and objectives Research methods and structure
Introduction CONTEXT o Fast changes in the global environment: uncertainty, challenges o Direct impact in companies: new commercial exchanges o Political powers affect international relations: unpredictable situations o Adaptation to new circumstances: change business plans o New actors are emerging in the world: more influencing o The economic crisis in the Eurozone: • Another factor to become international (domestic companies) • Rules and environments are not the same now o The global economic relations are different
Introduction RESEARCH MOTIVATION AND OBJECTIVES o The general situation that we are living o To know more about the emerging markets o To know more about the performance of the Spanish companies: • The specific ideas and real perceptions of business environments • The new strategic management plans • How companies are affected by the crisis and how they are operating to overcome it o To identify in an international context: • The core motivations to underpin the Spanish firms to take an internationalization strategy • Changes in the perception of the emerging markets • The most influential risks for the Spanish firms o To understand which forces are present in the international trade relations o To see if it is possible to take benefit from new managerial strategy o To offer a different perspective: the management of the political risks in business in emerging countries (from the Spanish companies’ point of view)
Introduction RESEARCH METHODS AND STRUCTURE o Methods: • Different data: tables, figures, indexes and rankings… from reports published by relevant international organizations • Direct analysis of the opinions and perceptions of the Spanish firms: - Survey: about internationalization, emerging markets and political risk management - An interview: a real example of the business experience of a Spanish firm operating in an emerging country - Other comments: in a seminar and spontaneously during the study period o Structure: • A wide review of the existing literature (theory framework and concepts) • The main methods used (applicability of data and sources) • Description of all the results: survey, interview (case study), other comments • Analytical discussion of the all research’s results (foreseen consequences) • Critical evaluation of the study, main conclusions and some recommendations
Literature review The economic situation Politics and businessInternationalization strategies and risk management
Literature review THE ECONOMIC SITUATION o Globalization and markets• Globalization: one of the most critical challenges that firms face / Competition - To develop new successful strategies in emerging markets - Affecting national business environments - Influencing the organizing principles and strategies of the firms• The selection of international markets is a fundamental decision (Couturier & Sola, 2010) - Valuation of information (Andersen & Strandskov, 1998)• Numerous studies about the determination of attractive markets - All are converging on indicators related to economic, social, political, cultural, etc. to establish the potential attractiveness of foreign markets - Specific of emerging markets (Arnold and Quelch, 1998 / Cavusgil, 1997) and (GlobalEdge, 2011)• Internationalization: relations are increasingly more dynamic - Periodic review of international markets in order to adjust the various indicators to the environmental conditions and economic cycles
Methodology THE ECONOMIC SITUATION • Market Potential Index (MPI) for Emerging Markets 2011 Source: www.globaledge.msu.edu
Literature review THE ECONOMIC SITUATION o Emerging markets• Emerging market economies: - Due to the widespread liberalization and free-market policies adopted - Rapid pace of economic development (Arnold and Quelch, 1998)• Difficulties: in stabilization and governance (uncertainty and risk) - Institutional voids: a prime source of the higher transaction and operating costs (Khanna & Palepu, 2010) – missing analysis• Recent fast growth in BRICs: the GDP rates, new middle class, advances… Potential due to size and economic performance but some problems remain• Today the growth has also slowed (IMF, 2012): - Reflects a weaker external environment (deceleration) - Remain volatile markets: uncertainty can still have a sudden impact in business - Old vulnerabilities remaining - Safer now but risk still exist: interdependence (industrialized economies)
Methodology THE ECONOMIC SITUATION • Global GDP Growth • Cumulative growth since the crisis Source: www.imf.org Source: www.deutschebank.com
Literature review THE ECONOMIC SITUATION o The Spanish outlook• Diversification of exports to new emerging economies - Exports to the Eurozone declined in the last 7 years - Sales to Africa, Latin America, Asia and the Middle East have increased• Specialization in more demanded production segments• Spanish economy: difficult situation for companies - Deterioration of domestic environment (banking crisis, austerity…) - Weaker capacity to absorb shocks: overextended debt - Problem for the private sector
Methodology THE ECONOMIC SITUATION • Diversification of Spanish exports (2011) Source: www.coface.com / Bank of Spain, Ministry of economy & Competitiveness and DataStream
Literature review POLITICS AND BUSINESS o The environment• The business environment influences the marketing strategic effort of a firm• Refers to the foreign nation’s culture, regulatory regime and market structure It encompasses the costs of doing business• Examination of the target country’s political orientation and system: part of the preliminary stage of the market selection (Cateora & Graham, 1999)• The importance of sovereignty: government involvements in business - Consequences for global business (Keegan & Schlegelmilch, 2001) - Unexpected decisions that can condition firm’s performance (policies) - Determine the level of freedom and democracy (ease of doing business) - Better adaptation and performance of companies to get profits
Literature review POLITICS AND BUSINESS o Democracy and institutions• Domestic politics are impacted by the world changing economy and affects the internationalization process (missing analysis of the existing interrelationship)• Developing countries have made big progresses toward democracy: - Global changes pressures hit them: credibility to policy makers (Rudra, 2005) - Globalization leads to improvements in democracy (more analysis of this relation)• Democratization literature: - Not focused on the impact of trade (effects of financial liberalization) - Ignores the impact on individual political rights and liberties - Political institutions emphasized (essential part in political risk analysis)• Power of negotiation (companies-governments) and time perspective: - Perceived high corruption abates a firm’s desire to cooperate with host governments, produces higher costs and generates unintended consequences (unpredictability of behavior and decisions) (Ackerman, 1999)
Literature review POLITICS AND BUSINESS o Democracy and institutions• Institutions in emerging markets: - Shape the strategy and performance of foreign and domestic firms - Countries differences: justification of developing alternative business models (now researchers are focused in emerging countries) (Peng, 2001) - Different business systems and different roles played by institutions• Institutional transparency: (Millar et al., 2005) - The lower the level, the higher the cost of investing and the weaker ability to attract businesses and external capital: low quality of institutions (PwC, 2003)
Methodology POLITICS AND BUSINESS • Low quality of institutions in many emerging markets Source: www.transparency.org / www.worldbank.org
Literature review POLITICS AND BUSINESS o Regulations• The regulations and their interpretation influence industry development and create favorable or adverse conditions for foreign companies: - Market entry barriers (highly relevant)• Understanding of the legal environment: importance in market selection Impacts in private sector (many issues)• Doing Business 2012: - Many obstacles in developing countries - Reform efforts: strengthening institutions and enhancing legal protections of investors and entrepreneurs - Policy makers are taking measures: domestic regulations are more business-friendly
Literature review POLITICS AND BUSINESS o Political risk• Political risk: received less attention - Implies a possibility of unwanted consequences arising from political activity - Usually host governments interference with business operations (Kobrin, 1978) - Several authors: events like political acts, constraints imposed on the firm or both (instability, expropiation, exchange risk, etc.)• General environmental uncertainties: Interdependence (Miler, 1992) - Associated with democratic changes in political regimes (not deep analyzed) - Uncertain companies: instability or even not change (government’s commitment) - The role of government in the provision of public goods - Macroeconomic decisions affect opportunities - Social uncertainty usually is a precursor to political changes• Evaluations of political risk: subjective, general and superficial (Kobrin, 1978) - Managerial tools focus on the potential profits from doing business but - Leave out essential information about the soft infrastructures (institutional contexts)
Literature review INTERNATIONALIZATION STRATEGIES AND RISK MANAGEMENT o Internationalization• Reasons for the internationalization of the companies: - Weaker domestic market or government initiatives (Kotler, 1984) - Pursuit of profit, achieve growth, saturated national markets (Jarillo, 1992) - Proactive and reactive motives (Czinkota & Ronkainen, 1995) - Access to new customers, reduce costs, improve competitiveness, advantage of their competences, risk distribution (Thompson & Strickland, 2004) - The current market conditions, search for new revenues, new alternatives, production, improvements, successful and business stability• Other external factors: unexpected circumstances not controlled by a firm• Spanish companies: figure out if the crisis is a significant factor that influences their internationalization strategies: - Domestic environments can be a motivation (not many studies about this approach)
Literature review INTERNATIONALIZATION STRATEGIES AND RISK MANAGEMENT o Strategic management• Companies need to develop a global vision and a new mentality (internationalization is not limited to big companies)• Global strategic management: - Determining a worldwide strategy and shaping firms to achieve goals and objectives - Interaction between the personal values of management and the firms’ skills and resources, and the relationship of these to environmental opportunities and threats and expectations (Fahy, 1996) - Development of capabilities, leaning process and more resources to reach adequate levels of competitiveness and adaptability (to the circumstances that minimize the risk and get positive growth) - Results are subjected to numerous variables (economic, social, political, cultural, demographic, country, company, product, etc.) - The crisis conditions: new alternatives, many decisions to be adapted to each situation, survive and success
Literature review INTERNATIONALIZATION STRATEGIES AND RISK MANAGEMENT o Competitiveness and business performance• Some authors argue that companies may develop also political skills to obtain competitive advantage and ensure the success against potential competitors: - The likelihood of implementation of a subsidiary decrease the higher political risk - Sometimes the performance of the firms can vary whether discretions are profitable (relationships between the governments and the companies)• The first-mover advantages: - Pioneering business can obtain positive economic profits - In emerging markets, the impact of political factors reduced those advantages for foreign companies (Nakata & Sivakumar, 1997) - Crucial role of governments in competition (in establishing entry barriers, not studied)• Spanish companies: in Latin America - Despite uncertainty, they positively evaluate the accessibility (agreements with official representatives without other interfering powers): competitive advantage - Social connections and informal channels (more important in complex markets)
Methodology IntroductionAssumptions: official data and valuable indexes Methods: the questionnaire and the interview Other considerations
Methodology INTRODUCTION o The empirical part: discover the motivations and the implications that environments can produce in business. If political risk affects the presence of Spanish firms in emerging countries and the attractiveness of them - Focus on BRICs (relevance, size, trends and last development processes) - Not easy to find complete and updated data • Different international data from organizations: updated reports, rankings, surveys and indexes published (evaluation and monitoring) • Directly to individuals: (Spanish companies) - Survey (using a questionnaire as a tool to gather information) - Comments (during the research process) - Interview (one company representative who can describe the experience of internationalization of a Spanish company in a emerging country)
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES o Some global data about economic results, GDP and forecasts from the IMF or the World Bank: • The World Bank’s Worldwide Governance Indicators (WGI) • Political country risk ratings (Euromoney or Coface) o Indexes from independent institutions: • Economic Freedom Index (Heritage Foundation) • Corruption perception (Transparency International) • The ease of Doing Business (World Bank Group) • General Political Risk Index (Eurasia Group) o To determine if the political country risk is a relevant variable to influence the management of international operations
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Global Political Risk Changes ECR Political Assessment scores, out of 100) Source: www.euromoneycountryrisk.com
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Country Risk Map (June 2012) Source: www.euromoneycountryrisk.com
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Economic Freedom Index Source: www.heritage.org (and own elaboration)
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Economic Freedom Index 2012 (indicators) Source: www.heritage.org (and own elaboration)
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Economic Freedom Index World Map 2012 Source: www.heritage.org
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Corruption Perception Index Source: www.transparency.org (and own elaboration)
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Doing Business 2011 (rankings) Source: www.doingbusiness.org/rankings
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Political risk index (safe as BRICs) *Higher number indicates greater ability to absorb political shocks Source: www.eurasiagroup.net
Methodology ASSUMPTIONS: OFFICIAL DATA AND VALUABLE INDEXES • Global Political Risk Index (GPRI) 2010 *The GPRI measures a country’s ability to absorb political shocks. The higher the number, the more stable the country. Source: www.eurasiagroup.net
Methodology METHODS: THE QUESTIONNAIRE AND THE INTERVIEW o Survey (50 questions) • Sample: managers, exporters, consultants, entrepreneurs, international trade experts, expatriates and local employees, also analysts and a shareholder • Functions: business development, marketing and sales, and management, but also others like legal, finance, risk management, human resources, customer services, consultancy, product or entrepreneur expertise • Sectors: services, industrial, food, technology, textile, habitat, construction • Type: small-medium enterprises, multinationals, start-ups, public companies, subsidiary, consortium and an association - Questions: divided in 5 sections 1) Internationalization 2) Emerging Markets 3) Environment and political risk 4) Strategy and international experience 5) Demographic data o Interview: direct information of an international business experience • Marta Fernández - Spaber Group (representative) • A Spanish company operating in Russia (logistic sector)
Methodology OTHER CONSIDERATIONS o Spontaneous comments and appreciations during the questionnaire’s reception process o Seminar: Valencia Chamber of Commerce • “¿Quieres vender fuera de España?” (Do you want to sell out of Spain?) – Wednesday, 12th September 2012 - SMEs interested in the internationalization, experts and authorities - Ways, tools, attractive markets, difficulties and advantages…
Analytical results discussion RESULTS o The data and the questionnaire• Emerging countries are having better economic results (Appendices A, B, C)• Clear potential and growth despite some problems (slowdown)• Trendy destinations for diversification of Spanish exports• Low quality of institutions, corruption is a relevant aspect perceived• Political risk: low positions (Brazil seems to be in a better position among them)• Ease of doing business: low level (China is a bit higher among them)• Deeper analysis of indicators: broader assessment of the overall situation of BRICs• Focus on the empirical results (survey): OPTIMISM - 74% of the companies say to be ready to be international - 57% consider they have enough information from government agencies - 51% consider that internationalization implies just opportunities (45% also risks) - Entry mode: alliances or joint-ventures (62%), direct exports (51%) and agents (36%) - 68% think that political risk is not sufficiently taken into account in business plans - 77% are highly interested in expanding in other markets, mostly in emerging markets
Analytical results discussion RESULTS• How do you describe the current situation viewing the growth of your business sector in the coming years?• Is the current crisis a determining factor when considering a strategy of internationalization?
Analytical results discussion RESULTS• What is the main priority for your company today?• Which areas do you consider more interesting for your industry?
Analytical results discussion RESULTS• Which factors would your company consider when choosing a market?
Analytical results discussion RESULTS• What are the main problems when entering in emerging markets?
Analytical results discussion RESULTS• Do you think that the political environment can produce effects in the internationalization strategy?• Do you think that it is more relevant in emerging markets?
Analytical results discussion RESULTS• Which risks in emerging markets do you consider more important/s?
Analytical results discussion RESULTS• Political risk… which statement is more consistent?
Analytical results discussion RESULTS• Will you start, maintain or increase an international strategy in emerging markets?• What are the reasons for an international strategy in emerging markets?
Analytical results discussion RESULTS• Do you think that an emerging market is more advantageous?• Do you think that government policy decisions can directly influence trade relations and business?
Analytical results discussion RESULTS• What are the most • Do you consider profitable significant obstacles? the presence in emerging markets despite the possible risks?
Analytical results discussion RESULTS o The interview• Marta Fernández (Sparber Group): Sales department in Moscow Sparber• Integrated logistics company, working globally (offices in Spain and abroad)• Customers: Spanish companies with a strong international policy in BRICs• More investments in other countries: significant more work in China• In Russia: 4 years working from Spain, after assessment and customer base the office was opened (in a rented space by SPRI – Basque Country Government)• Problems: lack of transparency, bureaucracy, corruption and risk (officials, in borders)• Advantage: less competitors (but now more companies are interested in Russia)• Cultural differences: changes in dates and times of the meetings• Adaptation and advises from people with experience and knowledge• Profitable presence in BRICs: international transport demands are increasing• Impossible to sell in Spain, but companies look outside and want results in short time• Positive personal experience• Advice: go to emerging markets with a strategy and medium-term plan
Analytical results discussion RESULTS o Other comments• Many strategy initiatives have no continuity or no stability based on a real international business plan (impatience to get results)• Some companies’ international experience based in the national market recession and not as part of their strategic development business• Lack the basic requirements to get outside: information, preparation…• Reluctance to be taught and helped• Capacity of improvisation and other “national virtues”: really defects to success• Disparity of measures to support SMEs in official public statements• No coordination of national, regional and local agencies (detriment of help)• Limited resources: necessary private and public funding (now less budget)• Difficult to change the corporate culture• Potential for success: excellent performance of many export companies
Analytical results discussion ANALYSIS• Spanish companies are changing their usual actions and mentality in business• Crisis: taken into account but not the most relevant factor (added to others)• Internationalization: improvement of strategic plans to be more competitive• Previously: easy and fast results in the domestic scenario - Lack of information and knowledge about markets - Complains about the lack of real support and coordination of official organisms (new programs) - Preconception about the difficulties of dealing with international business - Ideas about emerging markets associated just to risk and corruption (reluctance)
Analytical results discussion ANALYSIS• Globalization: changings, new economic flows, other advantages…• Economic and institutional development are influencing each other• Political risk: not completed evolution, there are still some conditioning risks (business environment)• Adequate plan: to manage risk and get profitable results• Attractiveness of emerging markets: despite a slower growth now and risks• Latino America: risky but more similar environment, competitive advantage• Other further possibilities: new scenarios, not saturated, the first mover• Spanish companies are better prepared for managing problems and risks they can take advantages from other more attractive markets than the domestic economy
Analytical results discussion CONSEQUENCES• Difficult to make conclusions due to the changings in the international arena• The relationship between politic and economy is influencing businesses• Openness of the markets: more international commercial operations and higher competition• To become global: better preparation and flexible strategies adapted to the different circumstances• The Spanish company SPARBER (example): - Initial experience and pioneering activities: competitive advantage in Russia - Look for similar niches of opportunities in other markets - Take profits from an increasing number of international commercial operations - It will be necessary: o To know about norms, barriers, infrastructures and the political situation of those countries (special issues in borders) o To figure out the main trends and needs to support increasing transactions abroad of global Spanish companies
Conclusions CRITICAL EVALUATIONo Focus on the relationship between: - The current international environment - The Spanish firm specific characteristics - The strategic plans for market growth and international business developmento The governmental regulatory influences the approach of doing businesso The entry to emerging markets must be well-planned: take advantages and avoiding possible risks (benefits) - Growth potential for the company on a worldwide basis and new learning• Constraints in the work: - Uncertainty in some predictions - Impossibility to quote broader all destinations of Spanish operations - Some points could be deeper analyzed in other specific future studies (topics) - Like business visa policies, bureaucracy systems, business ethics, performance of public domestic agencies, financial operations, etc…
Conclusions CRITICAL EVALUATION• Limitations of the chosen data: - None of the variables might be independent - The geographical area selected is essential - Possibility of other indicators not included• Resolution of limitations and enrichment of findings: - Improving the sample - Wider information and statistical treatment of data - Additional evidences of respondentso Future researches: clarify the main factors of the international business operations of the Spanish companies
Conclusions CONTRIBUTION• Special analysis of the international business environment, presence and internationalization plans of Spanish SMEs in emerging markets (taking into account also the domestic environment): - To extend the investigation to the general commercial operations (exports, subsidiaries…) - To expand the area focusing on emerging markets (not many papers related to Spanish firms) - To complement other previous studies (Ramírez et al. 2006 / Jiménez, 2011)• Useful conclusions for: - Directors of companies: to reflect about in their strategies, more information - Responsible for economic policy and investments - Who is interested in understanding the motivations of companies to operate in some countries• Practical description: potential and problems of some emerging markets• Valid study for future researches: the international performance of the Spanish companies from different perspectives (countries, type of operations, specific issues…)
Conclusions RECOMMENDATIONS• The market, as a whole, offers threats and chances of growth: Globalization - Domestic economic slowdown boosts companies to find new markets - Still reluctance, but new long-term strategies are needed to be competitive - Effort to understand countries’ differences to get results (strategic management plans)• To launch an international strategy (Spanish SMEs): - Change mentality (attitude) - Have sufficient information and choose carefully the target markets - Be prepared for rapid changes, accept new situations and be better adapted to them - Move faster than competitors (find the most profitable niches) - Reflect about the tools, methods and entry modes (according to the firm, sector and area) - Specialized professionals (knowledge and skills) - Search and develop a local network to get useful contacts - Good management of available resources and sometimes join forces (stronger, learn) - Use wisely funds, support and networks of official agencies (incentives or other measures) - Competitiveness and innovation to be different - Value: know-how, talent, quality and good products. The brand image of Spain can help - Long-term planning: Spanish entrepreneurs need more patience and perseverance always
Questions? THANKS! Russian Presidential Academy ofNational Economy and Public Administration INSTITUTE OF BUSINESS STUDIES