Going Global

The Problem with Top 10 Lists

In the current issue of Entrepreneur magazine, Laurel Delaney of Globetrade.com submits a "Global Village" column which purports to answer the question "how do you find the country in which to do business?" after you have "determined that your product can be sold abroad."   Her answer is to provide the top 10 from the World Bank's rankings provided in its report entitled "Doing Business 2007: How to Reform."  Unfortunately if you're an exporter, it's the wrong answer to the right question.

First off, the list ranks countries according to how easy it is to do business IN the country.  This indeed would be a useful starting point if you were looking to locate operations on the ground.  The fact that a country may be a relatively easy place in which to operate a business does not necessarily make it a good or easy market in which to sell product on an export basis.

Second, the key question for a company looking to sell product abroad isn't "What country is a good market for selling products generally?', but rather, "What countries present the best opportunity to sell our particular goods or services?"

The list, for example, includes Australia and New Zealand.  Both are good countries to do business in generally since they have well developed commercial laws based on the same English common law system which under-girds how we do things in the U.S.  From an export point of view, however, both are relatively unpopulous markets a great shipping distance from home.  Also, being island nations occupying their own parts of the Pacific, they tend to have relatively self-sufficient economies and much of their international trade is tied in with Asian countries which trade much closer in their spheres of influence.   This isn't to say that one or the other couldn't be a good export market for any particular product or service, but in my experience I'd be surprised if either appeared on a top 10 list of optimum export markets for most companies.

Japan also appears on the list.  As I've written about elsewhere on this blog, Japan, being a relatively homogeneous and populous market of affluent consumers with similar technological tastes to those in the U.S., can be an excellent market for many U.S. companies.  From an export point of view, however, Japan presents two challenges that can make it an expensive and time consuming investment for your average exporting company -- (1) it  has some very strict safety, health and environmental code requirements that can necessitate expensive and lengthy testing and approval processes, and (2) developing a quality distribution relationship can take quite a bit of time and investment given the importance the Japanese place on group dynamics and integration. 

On the flip side of these issues, from an exporter's point of view, the mere proximity and size should place Mexico on almost any U.S. company's top 10 list of possible export markets worth examining --  which is why, of course, it's one of the U.S.'s major trading partners.  Yet it is glaringly absent from the World Bank list provided by Ms. Delaney's column.

As a small business owner myself, I am a regular reader of Entrepreneur magazine and do find some useful ideas in its pages.  But if you're looking to select potential export markets for your company, there are far better places to start than this issue's Global Village Top 10 list.

How the U.S. Benefits from the Globalization of Trade

House Speaker Nancy Pelosi and Congressman Charles Rangel have been getting kudos in the financial press this week for taking leadership in forging a compromise allowing President Bush to move ahead on a couple of free trade agreements with countries in Latin America.  In fact, the agreements in question are minor compared with the more pressing free trade possibilities that continue to be tied up by protectionist led political wrangling, but it's certainly a step in the right direction.

Frankly it's a bit surprising that a politician can be haled for exercising leadership by championing an issue on which the U.S. is so clearly on the winning end of the bargain.  But such is the state of special interest group politics -- in this case to the detriment of the Democrats (although goodness knows the Republicans have their share of other special interest groups dragging them down).

In a column in the current issue (May 21, 2007) of Newsweek, Fareed Zakaria suggests that "Bill Clinton's most important political achievement was to transform the image of the Democratic Party into one that was in favor of growth, markets and trade."  He accurately bemoans the fact, however, that "far too many" among the current Democratic leadership "are parochial, pessimistic and paranoid about the global economy."

Among the benefits that the U.S. has reaped from globalization over the past 20 years, Zakaria mentions the following:

• U.S. companies have dominated the global marketplace;
• U.S. consumers have enjoyed low prices and low inflation rates, each of which increase the real value of their incomes;
• The American economy has grown faster than any other large developed economy;
• Per capita GDP has nearly doubled;
• Unemployment stands at a relatively low 4.4% -- about half of the rate in many European economies.

Zakaria's piece echoes themes that have been developed in previous posts on this blog -- particularly the observation that while globalization has resulted in real anxieties and displacement for certain people in the U.S., "the basic facts are indisputable: over the past 20 years, as these forces have accelerated, the United States has benefited enormously."

Just as many people abroad have been concerned with the current administration's unilateral approach to foreign policy and its seeming tendency to ignore established principles of international law, they are equally worried about the prospects of a Democratic administration which would gum up global trade by pushing a protectionist agenda advocated by organized labor and many environmental groups.  As Zakaria sums up these fears, it is hard to see how one can "plausibly hope to lead the world by abdicating America's historic role as the leader of an open global economy."

In his column, Zakaria poses a question that I think captures the point as well as any argument -- "What advanced economy in history that has closed itself off from the world has prospered?"   The answer, of course, should be obvious.

[Attribution Note:  The picture of the graph showing the impact of free trade on the U.S. economy is from a Heritage Foundation article entitled "Free Trade by Any Means: How the Global Free Trade Alliance Enhances America's Overall Trading Strategy" -- which in itself reinforces a number of points made here.]

China's Stock Markets -- Irrational Exuberance or Just Lot's More Money?

Just as with its economy, China's stock markets have been among the hottest in the world.  As the indexes have continued to rocket toward new record highs, the financial press has warned of the inevitable bursting bubble that follows such speculative investing -- or what Alan Greenspan once famously called "irrational exuberance".

After many years of investing, I've developed a certain sense of humor about the varied explanations for the daily fluctuations in various stock market indexes here in the U.S.   Of course with streaming internet news, those explanations are now minute by minute.  "Drop in Oil Prices Fuels Market Rally".  "Shaky Consumer Confidence Leads to Sell-Off".  I don't see big money suddenly moving in or out of the market based on big trends that are continuous and progressive for extended periods of time.

It seems to me there are two big engines driving money in, out and around the stock market -- (1) investors (whether individuals, firms or funds) looking to buy into good companies and (2) investors looking to mirror certain asset allocation criteria, whether a particular index of companies or a given mix between asset classes, industries and companies.  Decisions will be impacted by news that changes the assumptions about a particular company, price changes that alter the dollar mix of the portfolio, and, of course, the risk adjusted return available on alternative investment vehicles.  I don't see them being much affected by hour to hour changes in the price of oil futures. 

At the end of the day, the thing that makes indexes made up of multiple companies move over sustained periods of time in one direction or the other is the same thing that moves most other markets -- supply and demand.  Certainly one of the biggest drivers of the sustained stock market rally in the US in the '90s was changes in the tax laws, regarding 401K's for example, which produced bundles of cash in search of an investment.   The demand for investable assets drove the price of stocks as a whole upward.

The hockey stick curve that represents the trend in China's stock markets could be the result of crazy people throwing their money away.  But I think more likely, its caused by the rapidly increased demand for investable assets, resulting from so many people moving up the economic ladder, chasing a limited number of alternatives with competitive risk adjusted yields.   Which is not to say that its not risky, but it is to say that the exuberance might be rational.

So what does this indicate for the company trying to assess the prospects of business in China?  Don't be swayed by the headlines about the crazy hyper-speculative stock market, (unless your business is to invest money in those markets).   Instead you can view the activity as another symptom of a fast growing economy made up of lots of new middle class consumers with money to spend on your product (at least if the value of your product is more than the potential return in the stock market).

[Note of attribution: Pogo stick riding investor photo from an article appearing at Today's Seniors Network.com].

Can Mr. Sarkozy Fix Franconomics?

Perhaps surprisingly, it seems the French have a great deal in common with the New York Yankees.  It's not that they have set the gold standard for winning major sport's championships -- it's that people who have an opinion on the subject either love them or hate them.  Personally, I'm in the "love 'em" category with regard to both the French and the Yankees.  If I could watch the Yanks take on the Red Sox at the Stadium, followed by an evening stroll along the Seine with dinner at a small creperie surrounded by the charming locals, I might just think I've died and gone to heaven.

The other thing the Yankees and the French have in common is that they are both facing some serious challenges at the moment.   In the case of the Yankees, it's too many early season injuries to their starting pitching.   In the case of the French, its the legacy of leftist economics -- if that's not an oxymoron of sorts.

As pointed out in an article in today's Wall Street Journal on yesterday's election results in France, "unlike its left-leaning equivalents across Europe, the [French Socialist] party hasn't morphed into a Social Democrat movement that balances the pursuit of a dynamic economy with generous social welfare entitlements.  French Socialists are still driven by a strong, anti-free-market current."   

At least in the case of France, this leftist current results in applying simple algebra to economic issues where a bit more complicated calculus is necessary to understand the real world dynamics.  Thus, to use round numbers, they believe that 3 people working 40 hours a week is the same as 4 people working 30 hours a week, and hence in 2000 they sought to address high unemployment by mandating fewer hours in a work week.  Somehow they completely missed the notion that the cost of labor was not only a function of labor hours worked, but also a function of the productivity of that invested labor.  Given the high percentage of costs incurred in changeovers and the inefficiencies in training more people to produce the same amount of work, most graduate students in economics could have easily predicted what in fact happened as a result of the reduced work week -- productivity per labor hour declined, costs went up, companies hired fewer workers and unemployment did not decline.

A second challenge in French economic life is the impact of passionate civil protest.  When the Chirac government, recognizing the fallacy of the reduced work week tried to scale back the legislation, protests in the street reached such proportion that the government watered down the proposals originally intended to repeal the 35 hour work week to the point that they ultimately made the problem even worse.  They essentially kept the 35 hour work week with the proviso that the workers themselves could sell the entitlement to reduced hours back to an employer at a price that institutionalized the higher employment costs that were driving up the unemployment rate.

This scenario seems to repeat itself over and over.  Just last year the Chirac government attempted to address high unemployment among younger workers by making it easier to terminate a worker in their first two years of employment with a particular company.  This seemed like a reasonable proposal since a significant barrier to the hiring of new employees by French companies is that it is very difficult and costly to terminate them later, making labor a fixed rather than a variable cost.  Upset by this free market assault on the rights of workers to be employed regardless of the demand for or the cost of labor, the same people whom the government hoped to help by the legislation took to the streets in what were at times violent riots.  Despite determined talk going in, the Chirac government ultimately withdrew the legislation to stem the civil unrest ( I suppose that this tendency for passion before reason is why even in English we use French phrases for things like a "cause celebre" or a "coup d'etat").   The result, not surprisingly has been continued high unemployment particularly among younger workers.

From the stand point of international trade, one might be tempted to say that economic policies that drive up the cost of French labor does nothing more than hurt the French themselves by making their own companies less competitive in global markets.  Unfortunately, having chosen to legislate away free market equilibrium in their own country, they have no choice but to seek to protect their domestic industries from global competition the same way.  As a result, France is almost undeniably the most protectionist country in the EU.  This protectionism drives up the costs of goods in France, further increasing the costs of inputs needed by French companies to be competitive, the social costs of high unemployment, and the cost of living for those who do have employment.

It also stifles foreign investment.  If a foreign company needs to get on the ground in the EU, far better to do it in Ireland or Italy and ship into France than to incur the greatly increased costs of operating under Franconomics.

This is the system that newly elected president Nicolas Sarkozy has vowed to reform following his victory over socialist candidate Segolene Royal in yesterday's elections.  Already there are threats of strikes, protests and civil unrest.  Mr. Sarkozy has vowed not to let sound policy be hijacked by mob rule in the streets.  Unfortunately, France has a long history of such well intentioned vows falling prey to the power in the streets.

Positive Lessons We Can All Learn from the Battle for Global Automotive Supremacy

Last week the seemingly inevitable was announced -- Toyota had surpassed GM as the global leader in automobile sales.   The results announced last week were only for first quarter and GM is not yet willing to concede the year, but unless something unforeseeable happens, it's only a matter of time.   What might take longer is for Toyota to actually pass GM in the United States.   GM still has a sizable share advantage in its home market, but given the converging trend lines and US market share in the mid-teens, it would be hard to argue that Toyota is not already GM's biggest competition here as well.  Of course if one looks only at dollars of profit, Toyota is blowing the doors off all the competition everywhere.

For all of GM's struggles, however, on the global front the news is not all bad.  Buoyed by a 32% jump in sales, GM is the number 1 auto maker in the fast growing Chinese market.  Wouldn't it be an interesting piece of global irony if someday the largest car manufacturer is China is from the US while the largest car maker in the US is from Japan.

Fortunately most of us get to make our livings in industries less dysfunctional than the auto industry which is rivaled only by the airline industry as home to companies capable of losing so much money on billions of dollars of sales.  Nonetheless, there are several fundamental lessons that can be gleaned for all of us from the global competitive successes and failures achieved by the world's auto titans:

• Globalization is the inevitable result of modern communication, information and transportation technology.  You can spend your time fighting it and losing your competitive advantage to more adept global competitors or you can get with the program and become a global winner yourself;
• It is possible to carve out an enviable and profitable position in a foreign market even when faced with the hostile reception of the native industry's old guard;
• If you are successful at building a significant market position abroad through exports (significant here defined by the size of foreign sales relative to the balance of your company's business), you will need to move beyond exporting and develop operations on the ground in order to protect and continue to build that position in the future.

Keep repeating these three learnings to yourself -- they are a good foundation for global success.