Going Global

Disney's World -- Even a Global Behemoth Must Prove Nimble in the New Global Marketplace

If there is one product category that U.S. companies have been able to export where the American character of the product is itself part of the winning value proposition, it's cultural works such as movies, television and music (as well as cultural clothing such as blue jeans and slogan-bearing T-shirts).  And if there were ever a market that was begging for cultural products that appeal to the "tween" set, it's India where the population under the age of 14 is larger than the entire population of the US.

With that going for it, if there is a company that should be able to act as a global company in the sense that Ted Levitt defined it (i.e. a global company "operates with resolute constancy . . . as if the entire world (or major regions of it) were a single entity"), it should be Disney promoting family friendly movie fare in India.  As illustrated by its co-venture with Bollywood film studio Yash Raj Films to be announced today (and as detailed in an article in today's Wall Street Journal), Disney's efforts in India are in fact the latest illustration of the reality of the global marketplace discussed in previous posts on this blog.  Even a global behemoth must customize its product and service offerings in order to meet the demands presented by foreign consumers, who like internet age consumers everywhere, want what they want, when they want it and how they want it.

In Disney's case, even the tame portrayal of budding boy-girl relationships and sometimes peevish middle school behavior is offensive to the Indian film distribution companies and their audience.  Likewise, story lines based around baseball and basketball don't capture the imagination in a country where cricket is the national pastime.   Bollywood has also produced quite a few Indian movie stars who have much more appeal to the Indian audience than some of the names from Disney's stable of talent in Hollywood. 

In a clear refutation of Levitt's analysis of global corporate power to dictate what consumers buy, according to the WSJ article, Disney has had to change from its "traditional approach [which] was largely to force-feed its US products from its Burbank, Calif. headquarters."  Instead, "the company ultimately concluded the cookie-cutter approach wouldn't work, and now is going country by country."  The new global reality "means discarding Disney's historic obsession with going it alone -- and instead joining forces with local experts to produce culturally customized fare."

It's a global marketplace, but each country presents a different market segment and a different voice of the customer.  To be successful, you must make sure that your value proposition -- the story that you tell your customers -- translates well across cultural differences.

Russian Capitalism -- A Short History and Even Shorter Memories

Russia is among the hot emerging markets these days for companies exploring both export opportunities as well as international expansion of foreign operations.  There is no question but what the economy has stabilized since Vladimir Putin took the reigns of power and GDP has been growing at an enviable pace.  But while there are certainly viable business opportunities to be had in Russia, some companies that I've spoken with and read about seem to have forgotten that Russia is still a risky place to do business with a limited track record of success.

In our fast paced world where last year seems irrelevant to today's hot trends, it is easy to lose perspective on the fact that The Wall which segregated the former Soviet Union from much of the emerging global market economy came down a scant 18 years ago.  That historic event was followed by a decade of chaos during which the emphasis was on democracy for democracy's sake, leaving the economy largely in the hands of organized crime bosses. 

Putin, who came to power 7 years ago, has brought order to the chaos, but it seems to be coming at a price.  Indeed, while the economy as a whole has been growing, the European Bank for Reconstruction and Development reports that the share of the economy attributable to the private sector has actually declined.  AM Best gives Russia a "Tier III" risk rating.  With GDP (PPP) of $1.5 trillion, Russia's economy is 1/10th that of the U.S. or EU, less than 1/5th the size of China, and only about 40% the size of India's.  Given an economy propped up by world demand for its rich oil reserves, an increasing emphasis on government control of infrastructure industries and the media, and the recent saber rattling at the West, Russia in many ways resembles Hugo Chavez's Venezuela more than a hot emerging market.

Having gone from the state controlled economy under the autocratic rule of the Tsars directly to the planned economy of a socialist state without ever passing Go, Russia has one of the shortest histories with a free market economy of any country in the world.  If Russia were a stock, it would be on my watch list, but I'd be hard pressed to rate it a "buy" for any but the least risk averse investors.

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.

Morningstar in China -- An Individual Investor's View

China is such a hot market that any business thinking about going global is considering whether there is a China strategy that makes sense for their business.  And for individuals who don't have a business to take to China, there seems to be an insatiable interest in finding Chinese stocks to ignite their portfolio.  With that in mind, I thought I would share some of the insights contained in the current issue of Morningstar's StockInvestor newsletter.

Paul Larsen, the newsletter's equities strategist and editor, just returned from a month in China, training stock analysts for the company's new office in Shenzhen as well as getting his own arms around what's happening in the mainland's market.  He devotes much of the April issue to his observations.

He sees a number of competitive advantages enjoyed by Chinese companies, including:

• lax environmental restrictions ("[y]ou can forget the stories about an emerging environmental disaster happening here.  It has already happened". For more on pollution in China, see one of the many detailed posts relating to this subject on the China Law Blog)
• lax safety standards (the subject of a recent post on this blog as it relates to the lower cost of Chinese exports)
• a political structure which allows macro economic decisions to be made quickly without debate (depending on how those decisions turn out, this of course could be a disadvantage as well -- so far so good for the most part).

He also cites a number of competitive disadvantages:

• imperfect capital allocation (the invisible hand "is only operating with three fingers in China").
• corruption, nepotism and other systemic inefficiencies.

The principle issues that he sees facing investors in China are:

• the government's role as both major shareholder and regulator creates conflicts of interest which pose an uneven playing field for the individual investor;
• the markets do not have a mechanism such as short selling to allow market efficiencies to operate in both up and down market cycles;
• because Chinese investors are not permitted to invest outside of China and the only competing publicly available investment vehicles are low yielding bank deposit accounts, the country is flooded with capital, causing Chinese stock prices to be inflated in excess of their intrinsic value.

As a result of these issues, Larsen is left exactly where it seems so many stock advisory services come out when looking at China -- noting that it is an undeniably hot economy as a whole but facing great difficulty in specifying individual companies that trade at an attractive current price relative to their valuation adjusted by a reasonable margin of safety.  While he does delve deeper into a few specific companies that he thinks have potential, his bottom line conclusion is "unfortunately everything I found was either too scary (far outside my circle of competence or risk tolerance zone), too expensive (I'm here late in the boom), or cannot easily be purchased by foreigners". 

My own experience is that Morningstar is among the most rational (straight-talk, not hype) analytical services for individual investors, so I put some stock in what Larsen has to say about the Chinese market.  All things considered, building a business in China may well be the most sensible way to profit from its booming economy.  At least you have some control over the value that is created.

Unintended Global Consequences of Domestic Policy

With the political tensions in many of the key petroleum producing nations of the world, it would be hard to argue against any policy designed to lessen dependence on foreign oil supplies.  It is in this vein that the U.S. has enacted initiatives to increase the use of ethanol and other plant based fuels.  The Energy Act of 2005 mandates a three fold increase in the amount of ethanol based fuel produced over the next 5 years.  The policy is also supported by a sizable government subsidy paid to ethanol producers in an effort to make ethanol and other bio-fuels competitive at the gas pump since its production costs exceed gasoline even at the current high prices for a barrel of oil.

Between mandates and subsidies, the level of crop production going into ethanol as opposed to the food supply and feedstock is rising quickly.   According to an article in last Monday's Wall Street Journal entitled "Crop Prices Soar Pushing Up Cost of Food Globally", the volume of grain dedicated to ethanol production is expected to double from 2006 to 2008.   Of course this new source of significant demand, as implied in the title of the WSJ article, is causing prices to rise -- and not just for the crops themselves, but also for beef, eggs and poultry, all of which use corn feed as an input, as well as the myriad of processed foods that contain corn syrup as an additive.

Food prices in the United States are expected to rise faster than the general rate of inflation as a result of this policy, but the percent of income spent on food in a wealthy country is such that it can certainly be absorbed by the majority of consumers.  Higher food prices are simply the tax that must be paid in order to support the policy mandating the development of alternative fuels (although it is a regressive tax given that it is largely a tax imposed on necessities).

This may not be the case, however, in developing countries where a much greater percentage of the population lives on subsistence wages with a high percentage of income devoted to basic necessities such as food.  The inflation rate for food supplies in India, for example, is currently running at an annual rate in excess of 10% -- and that's at current levels of supply and demand.   As more and more of the world's grain supply is diverted to the production of alternative fuels, it is reasonable to expect food prices to soar even faster.  As food prices escalate ever faster than average wage rates, the result is likely to be an even greater hunger problem among the poorer populations in China, India and sub-Saharan Africa.

In addition to stemming dependence on foreign oil, a second driver of ethanol based fuels is environmental, although the validity of this impetus is less clear given the amount of energy currently required to convert grain into usable fuel, as well as the fact that these fuel products are more corrosive than petroleum based fuels, making it necessary to transport the fuel by truck rather than through pipelines.  For purposes of the interest here in international commerce, however, what is important is that pollution is also a global commodity.   As developing countries are required to devote more of their government budgets to offsetting rapidly rising food prices, you can bet that they will be forced to devote even less to environmental protection and pollution abatement.  While I am not aware of any study on this point, I can certainly imagine any gain in environmental quality produced in the U.S. and Europe being more than offset by increased pollution elsewhere on the globe.  And while plenty of people would like to pretend that problems such as poverty and hunger in foreign countries are not our problem, it is more difficult yet to make the case that their pollution is not going to be our problem as well.

One of the realities of globally integrated economies is that a policy in one country that affects the supply or demand of a critical commodity will have consequences elsewhere in the world.  In this case, those consequences could range from increased environmental degradation to higher rates of starvation.  Accelerating the development of ethanol and bio-fuels may in fact be the right thing to do, but I am concerned that I don't hear the people pushing this agenda thinking through or talking about the negative global consequences of this policy and whether or not we have any responsibility to ameliorate that impact.

Unique Financial and Business Challenges in the Islamic World

One of the things I enjoy about the challenges of international business is that there are always new ideas and perspectives to learn and understand.  It constantly challenges your world view and keeps your edge sharp.  I must say today I really had my eyes opened to an issue of which I was embarrassingly unaware until reading about it in a place no less accessible than the front page of the Wall Street Journal in an article entitled "Malaysia Transforms Rules for Finance under Islam".

I confess at the outset that my experience in business in the Muslim world is relatively limited.  While I have opened up distribution, put together manufacturing and sales JV's and been responsible for foreign based operations in Asia, Europe and Latin America, my business in the Middle East has been limited to a few LOC / cash-in-advance spot export sales.  The few times I had occasion to discuss broader distribution arrangements with potential Middle Eastern partners, when it got down to discussing credit terms, it seemed as if they wanted us to carry the financing for inventory but refused to pay anything for extending that credit.  I assumed that they were being needlessly difficult negotiators on a straight forward point of business and didn't expend the time to sort through the road block given the existence of easier and more lucrative business elsewhere in the world.

While I might have had some vague cognizance of the Islamic view of credit in reading at some point about the origins of the old saw "neither a borrower nor a lender be", it was not until I read the WSJ article that I understood that charging or receiving interest payments apparently violates a Quranic prohibition.  Perhaps my would-be Middle East partners were not intentionally being difficult business people as much as they were trying in earnest to abide by their Islamic faith.   At a minimum the true motive got lost in translation and the potential deals were killed even before they got off the ground.

The focus of the WSJ article is how Malaysia, being more distant from the more traditional Muslim faith centers in the Middle East has come to dominate Islamic international banking through the development of innovative financial products which mirror in many ways the workings of an interest paying bond, but which do not, strictly speaking, pay interest.  Instead, they are structured as profit sharing or real property rental pools based on business assets which secure what otherwise looks very much like a western debt instrument.    Not surprisingly, as with any issue tied up with a tenet of religious faith and the interpretation and application of religious doctrine, not everyone in the Islamic world concedes that these innovative financial instruments in fact comply with the requirements of the faith.

The result of all this is an entire shadow world of Islamic banking that parallels western banking, but which cannot easily or fluidly mesh with predominant international financial structures.   It seems the impact is enormous and far reaching.   At a first level, it has to make it considerably more difficult for businesses owned or controlled by Muslims to obtain the capital necessary to expand and compete easily in global market places unless they have direct access to the oil revenues largely controlled by the ruling sheikdoms.  Access to broader markets is limited and the opportunities for entrepreneurial start-ups of small businesses is hamstrung.  Indeed, when it comes to ordering any business idea around a rational assessment of risk and reward, it is going  to be more difficult in the absence of embedded interest rates, which at some level are the market's price indicators of normal risk return requirements.

It is often pointed out in financial guidebooks that one of the characteristics that separates the rich from the poor is that the poor have to work for their money while the rich have their money work for them. In an economy that prohibits the payment or collection of interest, it is virtually impossible for a person without the substantial wealth necessary to invest in sophisticated financial instruments to earn any return on whatever money they do have.  The WSJ article indicates that customers of the largest Islamic financial institution in Saudi Arabia have $18 billion in no-return checking accounts and that "because of concerns about illicit interest , savings accounts do not exist there."   Nor, I would assume, do CD's, money market accounts, bond mutual funds, or other simple savings tools which constitute the average person's entree onto the road of financial investing and intelligent money management.

On a more subtle level, the need to develop and maintain a parallel financial structure with complicated financial instruments secured by income producing assets has to increase the transactional costs to businesses throughout the Islamic economy.  I don't envy Muslim business people trying to succeed in a fast paced financially driven global marketplace given these limitations that inherently segregate them from many avenues of international commercial opportunity and necessarily disadvantage them relative to business people of other faiths who can operate without such fundamental financial restrictions. 

Having just begun to ponder all this, I don't have any brilliant insights, and it is a subject about which I will certainly seek to learn more.  It is certainly a dimension that anyone seeking to do business in the Islamic world needs to understand if they hope to structure deals that work for everyone involved.