Going Global

Venezuela -- Hotbed of Democracy AND Capitalism

In yesterday's post I discussed the Latinobarometro survey results, the seeming incongruity of Venezuela's high ranking in the democracy index while electing a socialist president by a sizable majority, and what that and similar international events say about any correlation between democracy and capitalism.  Well, it turns out that at least in Venezuela there is apparently a high correlation between pro-democracy attitudes and capitalist success.

Waiting for me when I got home last night was the December 25 issue of Fortune magazine which contains the Investor's Guide 2007 (am I the only person who wonders why, having come out on December 14th, it's not the December 14th issue, and is that determination made by the same people who begin sending "urgent" renewal notices a mere two months after renewing my annual subscription?).  Anyway, one of the features was the "Global Scorecard" for 2006, including a list of the best performing world stock exchanges (p. 189 in the print edition).  Is it just coincidence that the best performing stock market for the past year was the Caracas stock exchange with the index delivering a total return of 150%?

Many people might say that using stock market performance as an indicator of capitalist activity is like using the customer traffic report at a gambling casino, but the fact is that absent fraudulent manipulation, market performance is driven by supply and demand, and the upward performance of an exchange index such as the one in Caracas is a good indicator that for the period in question more dollars (or in this case Bolivars) were seeking to invest in the companies that make up the index than were seeking to exit the market.  Indeed, the reason I track some of the leading stock exchange indexes in the right hand column of this blog is that they are indicators of the capital investment environment for local businesses.

So democracy at 70%, the market up 150%.  Who would have thought? -- Hugo Chavez, good for democracy, good for business.  What's not to like?

Political Attitudes and Political Risk in Latin America

A significant hesitation among many small businesses contemplating an international business strategy is the concern that political attitudes in many countries are either unknown and unknowable risks or what is known sounds risky for business.  Larger companies, although certainly wary of political risk, tend to have the size and diversification necessary to take on comparatively larger risks, but for a small business, political risk in a significant market can be a "bet the company" proposition.

For companies interested in assessing markets in Latin America, the December 9 issue of The Economist publishes the data from the annual survey of political attitudes undertaken by Latinobarometro in an article entitled "The Democracy Dividend" (page 45-46 in the print edition).  The survey contains data from each country on attitudes toward democracy, critical political issues, the effectiveness of the political process generally, and institutions that make up the political fabric.

Some of the data may at some level seem counterintuitive.   For example, Hugo Chavez's Venezuela ranks fifth on positive attitudes toward democracy with 70% of the people saying that democracy is preferable to any other type of government.   Similarly, Venezuela is second in the percentage of people saying that they are satisfied with the way democracy is working in their country.  Interesting results for a country which reelected by a significant majority a president who is largely vilified in the U.S. as being the communist Castro's socialist compadre to the south.  Perhaps we should consider whether a democratically elected socialist in Latin America is any better or worse for business than one elected in say Germany.   

I was wondering whether there might be some positive correlation between a commitment to democracy and the business environment in a particular country.  Uruguay, Costa Rica and Argentina top the rankings of countries where democracy is viewed most favorably, and certainly each of those countries present fairly stable business prospects at least from the point of view of political risk -- economic swings might be a different matter.   But just when there seems to be some connection here, one notices that our largest Latin American trading partner, Mexico, is in the bottom half of the list with only 54% saying that democracy is the preferred form of government, and Brazil, the other most significant market, ranks even lower at only 46%.  Couple those results with what has evolved in China and one might question whether capitalistic market development and democratic political attitudes are as interdependent as generally thought in the Euro-American orientation to political economy.

As I study the data in light of these questions, I am thinking that perhaps the most important findings in the Latinobarometro results is the narrow band in which people define themselves on the political spectrum between left and right.   On a scale from 1 to 10, with 1 being the furthest left and 10 being the furthest right, the countries ranged from Uruguay which had an average perception rating of about 4.7 to the Central American countries ranked as a group with an average perception rating of about 5.7.  Indeed, to display much dispersion at all, The Economist published the results of this 1 to 10 information on a chart with a scale from 4.5 to 6.0.   Whatever is going on in the governments of the individual countries, the people in those countries, at least on average, see themselves as pretty centrist -- which I think is a good place for any country to be when it comes to doing business.

I've mused elsewhere in this blog whether one of the results of the global integration of markets isn't to put a damper on the influence that political extremes can have on the economic environment in any given country, contrasting in one post, for example, the political instability in Mexico with the historically stable economy.  Political risk is a worthwhile consideration, particularly if you are doing business with the government or engaged in a critical infrastructure industry where nationalization is a concern, but for most businesses, a far greater question is the perceptions of the individuals who make up your market of suppliers and customers.  On that score, markets in Latin America are looking up.

Leveraging Someone Else's New New Thing

With the quickening pace of change and the corresponding shortening of product life cycles and the efficacy of an existing business model, perhaps the biggest single strategic challenge to the long term success of a business is finding new products or services that can revitalize the company.  Unfortunately Tom Edisons and Steve Jobs are in short supply.  Paradoxically, it seems as if the more change creates instability in the work force, the less willing the average anxiety ridden person is willing to take the risks necessary to create the significant innovations necessary to provide sustainability in the face of such world altering change. 

If you're having difficulty conceiving of the New New Thing, to borrow a title from Michael Lewis, it may be worth looking at other people's burgeoning innovations.  Some of the most dynamic industries in today's market place are premised on developing new businesses that live off the synergies of someone else's new product development.   I'm not talking about infringing someone's IP -- goodness knows there's too much of that going around already.  I'm talking about compatible business extensions that are generally welcomed by the original innovator since they grow the market potential and stickiness of their own product as well as yours in a symbiotic relationship.

As large as eBay has become, it has spawned an entire industry of eBay businesses that dwarf the auction business itself.   Just read any franchising magazine or look at the entrepreneur section on Amazon or at the local Barnes & Noble for a sense of the businesses that both feed and feed off of eBay.  Another example is the industry for IPod accessories, as referenced in a previous post about the IP resolution between Apple and  Creative Technology, Ltd.  You also may have heard of Jibbitz, a very successful business based on providing "jewelery" that snaps into the holes on those ubiquitous Croc lightweight plastic clogs.  Without someone coming up with Crocs, who would have thought of Jibbitz?

I discussed in an earlier post the importance of going to trade shows as part of your due diligence in investigating your product's efficacy in potential export markets.   Another good reason to go to cutting edge trade shows is to spot the new new things in the industries your business is geared to.  Your company may not invent an IPod or a Croc, but once your people see it in the flesh, they might come up with a PodFreq or a Jibbitz, and that could be just the innovation you need to keep your business model relevant in the face of accelerating global change. 

You're Not Alone -- Or, There is More than One Person in China Who Knows Your Business

I was meeting with a prospective client recently who had a story that was both frightening and yet familiar.   The company had been working with the same agent in China for the past three years with virtually nothing to show for it.   Far worse, over the course of successive joint trips to China over that period, the president of the company had concluded first that the agent "wasn't worth very much", then that the agent was "affirmatively incompetent", and most recently that the agent "couldn't be trusted" and was looking to steal the company's IP.  I should have been shocked, but wasn't. to learn that another trip to China with this same agent was scheduled for next month.

"Why do you keep using this person if you're convinced that he's not only a worthless incompetent but dishonest?" I asked, knowing the answer that I've heard before.  "He's our contact -- how would we find someone else?"

The more distant and foreign a market is, of course, the more you need someone you can trust to help you navigate the unfamiliar waters.  It seems, however, that the more distant and foreign a market is, the more small businesses latch on to the first contact they make who speaks passable english and expresses a genuine interest in their business.  It's a paradox -- and a dangerous one at that.

I pointed out to my friend struggling in China that with 300 or 400 million people engaged in the new economy there was surely more than this one person who had the skill set to help his business.  He agreed but was still mystified at how to locate these people.  A lot of small business people are used to going it alone.   They're independent and resourceful and frequently they wing their way into international markets the same way they've winged their way into other business opportunities -- through grit and force of will.   Unfortunately in these strange and foreign lands, you still need the right partners and personal resourcefulness generally isn't enough.

So --

• Network through a World Trade Center Association or internationally focused chamber of commerce;
• Use the services of the U.S. Department of Commerce or the SBA and USEAC offices;
• Go on a trade mission sponsored by your state's office of economic development;
• Hire a good international business consultant with experience in your industry or the country in which you're seeking to do business.

There is no need to go it alone.  Find the right partner and just as in a business deal here, run, don't walk, from the bad ones.