Going Global

Eirinn Go Brach -- Bridge to the EU

If you are a company whose products or services appeal to the wants and needs of businesses or consumers in a fully developed economy, then Europe has to be on your short list of new markets to explore.  Although the economy of any individual member country is far smaller, when aggregated, the nominal GDP of the EU is larger than that of the US.  And while the go-go growth of emerging markets such as China and India is alluring, as things stand today, the EU's combined economy is over 5 times larger than China's and over 16 times larger than India's. 

As discussed elsewhere in this blog, the EU can be a daunting market to get one's arms around because while it is in some respects a single market, it remains in many respects many separate markets divided by language and cultural preferences.  Among the critical common issues that need to be addressed by the hopeful exporter, however, are fine tuning your value proposition to ensure that it connects with European sensibilities and getting your cost structure, pricing and accounting synched up to effectively do business in Euros instead of dollars.  Until these two issues have been effectively addressed, it doesn't make sense to spend the money to translate literature and get potential sales agents or distributors up to speed in 10 different languages.

So where do you start?  I would suggest that the Republic of Ireland is a grand place to jump in.

Although Ireland retains its native Gaelige as an official language, English is also an official language and is universally spoken and used in both business and everyday life.  Accordingly developing market intelligence through conversations with potential customers, suppliers, distributors and others is easy and comfortable.  While this would also be true in the UK of course, Ireland, I think, presents a few advantages over England as a bridge to business in the EU.  First and most directly, while England is part of the EU for many purposes, it did not adopt the Euro as its currency whereas Ireland did.  More subtly but of equal importance, Ireland seems to be culturally more in tune with the continent in many ways.

Ireland also has a very sophisticated and welcoming business climate with a well developed technology sector and a motivated and educated work force.  Evidence of its well developed economy can be found in the fact that Ireland's per capita GDP is among the highest in the EU, second only to Luxembourg. As with many nations surrounded by sea coast, it also has a lengthy and in-grained history of importing and exporting -- you'll be dealing with people who know how to sell foreign goods. 

If you have a product that requires a certification (an EU equivalent of a UL rating, for example), as a general matter, if you obtain the certification in one EU country, it will be transferable to other jurisdictions within the EU.  Many of the challenges in obtaining this type of certification can be made more navigable by being able to deal with testing agencies and regulatory authorities who speak English as a first language.   So again, clearing these hurdles in Ireland can smooth the way for subsequent entry into other European markets.   

The fact is in many respects Ireland can provide a very effective bridge for any American company seeking to develop new export markets in Europe.

On the downside, you will probably have to go out for one evening of traditional Irish food such as black pudding, but rest assured that, in my experience at least, even the Irish prefer to entertain their out of town guests by taking them to some of the many excellent Italian or Chinese restaurants in Dublin -- and a lovely evening at the Clarence Hotel (owned in part by U2's Bono and Edge)in trendy Temple Bar could well be on the agenda.

Globalization, Change and Education -- What It Takes to Prosper in the 21st Century

In the US and most developed western countries we think of education in terms of math, science, history and literature.  These are the tools necessary to understand and succeed in the secular world.  It's easy to forget that not all the world views education this way and, unfortunately, this difference in educational perspective may have much to do with the gap between the haves and have-nots in the global marketplace of the 21st century.

If you are doing business in predominantly Islamic countries, I commend to you the article in yesterday's Wall Street Journal profiling Azim Premji, the head of Wipro Ltd., the large Indian firm that provides outsourcing services to many global brands.  With a net worth estimated at $17 billion, Mr. Premji is reported to be the world's richest Muslim who has not derived wealth from the royal control of oil resources.  He is also a Muslim thriving in the predominantly Hindu culture of India.

Apparently Mr. Premji is the object of criticism from many struggling Muslim's who are among India's most impoverished residents because his fabulously successful company hires only a small percentage of Muslim employees relative to the proportion of the country's population that adheres to Islam despite the Islamic faith of it's CEO and principle owner.  The limitations imposed upon Mr. Premji by his country's and his faith's perspectives in this regard are instructive about the education gap and the consequent wealth gap found between developed and developing countries in the world today.

As background, one should appreciate the extent to which Wipro is a paradigm of the need to be flexible in order to survive and be successful in a global economy where the rate of change is ever increasing.  When Mr. Premji took the reins of what was then known as Western India Vegetable Product Ltd. in 1966, the company had annual sales of $2 million and produced primarily sunflower oil.  When India took a turn toward socialism in 1977, many multinationals fled the country, leaving a vacuum in India for the products that they had been producing or importing, including electronics and computer hardware.  In a radical departure from the vegetable oil business, Wipro entered the vacuum, becoming one of the country's leading manufacturers of computers and consumer electronics.

In the 1990's, India moved quickly back toward capitalism and the rush of global corporations back into the country displaced much of Wipro's market -- a global economic change that would have been the death knell for many less flexible companies.  But instead of wilting in the face of this onslaught of new international competition, Mr. Premji again saw opportunity instead of threats and once again completely retooled Wipro's business.  Today, of course, Wipro is a global powerhouse listed on the New York Stock Exchange with a $20 billion market value.

So why does Wipro hire so few Muslims?  Being that Wipro's customer base is made up of global companies and that English is the international language of business, they look to hire people with some proficiency in English.  Not surprisingly, they also look to hire people with some education in mathematics, science, engineering and business so that they can understand their client's businesses as well as become successful employees supporting Wipro's own successful business strategies.

Most of India's Islamic population who attend school attend traditional Muslim schools.  Here they work on memorizing the Quran in its original Arabic.  There is no science and no English in the curriculum.  This is not an oversight but done with intention as these schools see a career in a global capitalist market as a bad thing not to be desired or pursued.  The WSJ article reports on an interview with an imam who runs one of the traditional Muslim schools in which he opines that "a future as self-employed shopkeepers or peddlers is preferable to seeking formal work at a large company."  The imam is quoted as adding "A job is like being a slave."

For most of us with a Western world view, education is the principle vehicle through which we would hope to overcome the cultural divides that separate people in a world becoming ever smaller through communication and transportation technology.  We also believe that education is the means for providing people with the opportunity to create a better and more prosperous and vital future for themselves.  Clearly Mr. Premji shares this view, but the fact that it is not a universally held perspective presents some significant challenges for Mr. Premji as a Muslim in a capitalist world -- to say nothing of the challenges faced by companies seeking to be capitalists in the Muslim world. 

LIBOR and National Funds Rates -- How the Globalization of Markets Displaces Politics and Governments

Between hedge funds and mutual funds and international M&A activity, markets for credit and debt instruments have gone global.  As a result, what started as the sub-prime mortgage implosion in the U.S. has caused tightened credit across international financial markets. 

The money used to fund mortgage loans to otherwise uncreditworthy buyers was raised largely by reselling the mortgages in pieces on the secondary markets.  The idea, not unreasonable at the time, was that this spread the risk of default across a wide swath of secondary instrument buyers, each of whom held a diverse portfolio of slices of potentially bad loans.  Unfortunately the result in retrospect has been to spread the credit collapse across the world like a passenger with a bad cold on a long intercontinental flight. 

Large banks around the world wound up holding, either directly or through participation in hedge funds, enormous portfolios of securities whose net asset values were crashing as the underlying loans supporting that value went into default.  As banks saw their asset base declining, they tightened up their lending practices accordingly.  More than just tightening their lending of money, a couple of large banks, most notably in France and Germany, barred certain customers from even withdrawing their own money held on account -- often a sign of a real impending banking meltdown.

Tight credit leads to a corresponding decline in consumer and industrial spending in an era of borrow now and pay later budgeting.  And a sharp decline in private sector spending can quickly lead to an economy spiraling downward into recession.   Not surprisingly in the face of this prospect, and bolstered by nervous constituents about to see a cutback in their credit enhanced lifestyles, governments around the world are trying to loosen up credit markets in the hopes of keeping money on the street and the economic engine well-oiled.

The vehicle that governments use to accomplish this is to lower their equivalents to what in the US is called the federal funds rate, that is the rate which the central bank charges its national constituent banks to borrow overnight money.  By lowering the cost of money from the central bank, the expectation is that the constituent banks will borrow more money which can then be put out onto the street through a chain of loans to each banks respective customers.   

This all worked quite well of course so long as banking was largely a business that operated within national borders so that the principal source of new money to a country's major banking institutions flowed from that country's central bank.  Changes in the federal funds rate would cascade down through the system and each country's government could use this monetary control to ensure that its political / economic agenda was pushed out into the market place.

As with all these national policy constructs, a funny thing happened when the economy went global while governments remained national.    Large international banking companies, it tuns out, raise much of their capital through the trading of securities and purchasing of credit instruments (i.e. borrowing money) from other international banks.  Money flows around the world markets very much like every other good and service.  In order to regulate this commerce through a market price mechanism, international interbank borrowing is generally pegged not to an individual county's federal funds rate equivalent, but to the London Interbank Offered Rate or LIBOR. 

LIBOR is essentially the interest rate charged by banks on short term loans made to each other.  The rate is set daily by a distinctively private sector institution, namely a British banking trade association.  It has become so widely accepted as an international standard for the cost of short term money, that the published rate is also used as a bench mark for a wide variety of private financial transactions, from intra-company lines of credit to adjustable rate mortgages.

Here is the rub -- when lending money gets riskier, in a free market, the cost of borrowing money goes up to adjust for that added perceived risk.  Thus, while government controlled central banks are lowering rates in an effort to ease credit, LIBOR which is a private market based rate is going up to reflect the fact that all these defaults are making credit more risky than previously perceived.  And since so much money flows through international financial markets based on LIBOR pricing rather than the federal funds rate, the increases in LIBOR may well offset any efforts that governments are making at easing credit markets and increasing the flow of funds.

Somewhere here lies a fundamental philosophical question -- i.e. in the long run, are we better off responding to problems like the subprime mortgage mess by having prices reflect changes in supply and demand in private markets or by having prices reflect the government's view of sound political / economic policy (the government being made up of learned experts or bureaucratic buffoons depending on your personal point of view).  Then again, as with many other such questions, the seemingly inevitable globalization of markets may have rendered our individual answers to such questions largely irrelevant.

[Note of Attribution: This post as with most is an application of my thinking over the past couple of months around a plethora of articles and sources on the subprime mortgage mess and the reactions of central banks and financial markets.  To give credit where credit is due, however, the immediate inspiration to get it down in a blog post came from an excellent article on the subject that appeared in this past Wednesday's Wall Street Journal entitled "Why Libor Defies Gravity: Divergence of a Key Global Rate Points to Strain".]