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Archive for February, 2008

Chief executives have consistently cited backlash against globalization as one of the main risks facing their operations across borders.

We’ve heard about this risk for a decade now. Sometimes they materialize into concrete fights, like the French farmer Jose Bove attacking a McDonalds in Millau in 1999, or rioting in Genoa against the G8 summit in 2001. India has also seen boisterous protests and fights, some of which are detailed in my upcoming book, India’s Open-Economy Policy (London: Routledge, Autumn 2008).

Conventionally, there are two components to mitigating this risk. First, intelligent companies make local-market adjustments, especially on product packaging, messaging, and some times composition, while retaining the advantages of a global brand to the extent possible. Second, they engage in public relations campaigns, either to promote their products and image or to blunt the critics. Sometimes, when things get really bad, they can enlist the protection of the government for their physical properties.

But companies seldom address the structural factors that can minimize local-market risk. In India, for example, the main political risk does not come from physical vulnerability or even cultural imposition. After all, India is one of the most vibrant multi-cultural countries in the world.

The major risk in India and many other emerging markets comes from government regulation and a possible change in political direction toward protectionism–and this even after the government has consistently liberalized the economy and taken a more hands-off approach. Why is this?

Inequality in India is increasing, as is conspicuous consumption by new Indian billionaires. Election outcomes, however, are determined by the poor who are the outstanding majority and most of whom are bypassed by many Indian companies, let alone multinationals. They do not feature in market research, since their wallet size is small.

But they do need to be factor in the political calculations of foreign companies operating in India. Their unhappiness with globalization was one of the main reasons that BJP, a very pro-investment political party, was awarded a thumping defeat in the last national elections.

Confederation of Indian Industry (CII), which is India’s main industry association, is well aware of this risk. A year ago, they wrote in a briefing for the World Economic Forum:

Indian elites have become more globally interconnected, but the poor and lower middle class are still disconnected and not feeling the benefits of globalization and liberalization. The mismatch of interests and/or perceptions of globalization, if negative, could lead to an endogenous backlash, protectionism and social and political tensions.

This is where the problem lies. It is this mismatch of interests that sparks visible anti-globalization backlash. It is also something that democracies such as India will not be able to overlook, especially during election time.

Thinking beyond wallet size. There are ways to mitigate this risk for international businesses. They need innovative PR programs that address what I’m calling their “political market,” which is different from their direct customers. They need to research values and trends in this market. They need to build on and showcase achievements that are consistent with local values and priorities. They need to align their corporate social responsibility efforts with their political marketing efforts. 

Systematic strategy and investment in this will pay off by mitigating one of the key long-term concerns that haunt executives. It will also be able to prepare a new market not just through putting up billboards but through being accepted by locals as an organization of value.

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A new book, Billions of Entrepreneurs, by HBS professor Tarun Khanna reiterates what microfinance organizations have been saying for decades: local-level entrepreneurship in India and China is thriving and will only become a larger force in their economies. Not just economic–local entrepreneurs are able to make a large social impact relative to the size of their investment. Local-level health or education initiatives are prime examples. In Bangladesh, an organization called Champions of Change are uncovering unnoticed innovative local-level initiatives. Donors are also beginning to take notice: in place of large greenfield investments hatched in their headquarters, they are beginning to toy with financing schemes that support locally-generated initiatives. Google.org, the philanthropic arm of the company, has just finalized its strategy of supporting the world’s “biggest, most imminent, least well-resourced problems”–and a good part of their attention is to support small, local entrepreneurs in developing countries.

In major emerging markets that have large populations, the importance of the local will only increase, even as globalization, the coming together of the world, continues apace.

One set of players remains largely outside this growth market: Western multinationals in the services industry. Market entry into India and China is a part of the strategic plan for most of them, but their entry in general is characterized by (i) acquisition of existing businesses, and (ii) geared toward the upper-middle classes as the customer base, mostly in urban areas. This makes some sense: these markets are more formal and easier to evaluate (even though credible business information is still scarce in China) and acquisition is the easiest way capture a customer base. This type of growth can also be planned better from headquarters. Short-term acquisitions in fast-growth economies can also be a good investment strategy.

But longer term success in those markets will depend considerably on what goes on outside the upper-middle class customer base. The insights, trends, preferences, and socio-economic impact of the vibrant local entrepreneurs in India and China will affect market conditions in the seemingly insulated upper-class urban bases. Local entrepreneurs are also benefiting from (and causing) economic growth, and although they are often unorganized, their combined economic clout is significant. Many of them see foreign investors as a threat, and also as entities that are not attuned to or supportive of their needs.

And most importantly, it is they who make or break governments, especially in democratic countries. Almost all large-scale political threats to foreign investment in India were sourced in local grievances. India’s BJP lost the last general elections mostly because its policies were seen explicitly to favor the upper-middle classes leaving the large majority neglected. Activists are often supported by local entrepreneurs, who now have the wherewithal, who have no shortage of innovative ideas, and who may some day number in the billions. Are foreign investors ready to go beyond number-crunching to qualitatively understand local market dynamics and risks?

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