Corruption maybe one of the biggest stumbling blocks for Western companies investing in the emerging markets. Let’s face it, those of us who have been doing business in developing countries for the last couple decades, know too well that the rule of law takes a back seat when a country can barely keep above water trying to stabilize its economy, or prevent potential upheavals of national security. Fighting corruption has only just begun to move in the forefront where countries are showing signs of economic stability and evidence of a middle class. Some strong public statements made recently by President Dmitry Medvedev on this subject is just one indication that this issue is now taking a higher priority. However, despite all the reforms and anti-corruption measures taken thus far throughout the region, corruption will not go away over night. Even within the “developed” world, corruption still exists, so therefore, nobody should expect it to be wiped out completely from the emerging markets anytime soon as well.
For those of us who made the strategic decision to enter these markets, it is most important to consider how to deal with corruption in the now, rather than wait years into the future for “better times” when it may be too late causing your business to miss the opportunities that exist today. Many of you out there already have heard or even have first hand experiences on how bad corruption is in this region. On the other hand, there are also plenty of stories from those who have learned how to cope with it and can share more positive insight on this. Please keep in mind that levels of corruption are different everywhere throughout the world. Even in the U.S., the levels of corruption have been historically more evident in some certain cities than others. In the emerging markets, this is no different. We all know that Russia has had problems with corruption. However, from my own experience, this varies from region to region and may differ from industry to industry. Far as other former Soviet countries are concerned, they fare no better when it comes to high-levels of corruption, and in many cases Russia’s neighbors are even worse. The problem here is that all too often Russia gets stereotyped as if corruption is a part of their genetic code, while the newly independent countries that have embraced Western democracy are stereotyped differently as open business havens for transparent and honest business. This is nonsense, and if you have ever done business in some of these pro-Western “democracies,” then you know what I am talking about.
The good news is, that despite how bad corruption is, overall it is much better now than a few years ago as the economies improve and governments have more resources to deal with it. If you were one of those first brave pioneers to attempt business in Russia, Ukraine or other CIS countries after the collapse of the USSR, chances are you probably packed up and went home frustrated. Today, you may find a completely different environment with different conditions as compared to the wild 1990’s. On the other hand, if you bribed the right person back then, you probably could have just about achieved anything imagined. Today you may find it much different. All the same, your business should expect, plan and take measures on dealing with corruption no matter where you decide to set up business overseas.
Here are just a few solutions to consider regarding corruption. Please keep in mind that you can apply these solutions just about anywhere keeping in mind that results vary.
Due Diligence – You have researched the country, conducted market studies, analyzed the risks and competition; now you have a solid plan to launch your operations. But was corruption a part of your due diligence? Hopefully yes, and while most companies do a good job conducting due diligence on their future partners, many forget to conduct due diligence regarding their industrial sector and location of business. How well do you know how to navigate in the specific location where you will be registering your business? With current intelligence and proper research, you can avoid corruption by selecting the right location. This is why most companies prefer to set up shop in the capital cities rather than in some far off province where the ruling officials think the Soviet Union is still enforce. Although sometimes this is not the case and the realities may vary. And while Moscow and other big cities become over concentrated and too cost prohibitive for many operations, more opportunities are popping up in provincial areas. This means you will need to identify other places to start your market entry.
Public Relations and legal expertise – How you are perceived is very crucial when doing business. If you are already doing business in the region, you already know full well that having the right local connections with the elites in your industry and local government are absolutely necessary to make your venture work. More so than in developed nations, approvals are usually made at the highest levels of government, although this is starting to change in some places. On top of all that, the locals will often have high expectations of foreign companies. Sometimes this is OK for the overall public relations effect, but beware – often times it means the locals will think you arrived to their country with suitcases of cash. While many companies think that they can just market themselves like they do back home, it is very important that you have expertise on not just the cultural trends, but political as well. One of my first projects that I worked on received fierce opposition from the local trade unions. Before you knew it, the local media was reporting that US companies were coming to take property and jobs away from the locals. Once this story was out, we received interference from the government to carry out the project. While understanding the root of the problem and knowing how to break through the cultural barriers, we convinced the trade unions and government officials about the benefit of our project and the jobs that it would create. The result? The next time they were on the news, the officials were promoting to the public that our project was their idea and not ours. Although this is not corruption in a classic sense, there was no use going after the media for stating false information. Instead we turned the situation around in our favor. Bottom line, if you don’t get the buy in from both the customers and the civil authorities, you will be faced with tough obstacles ahead.
Nearly everywhere I have travelled in the region, I find that the locals have a more negative perception of their government than the foreigners. This makes sense since with having all the memories of living their lives and trying to raise families in a corrupt system. Even though many reforms have taken root and more rights are being established for the common person than the previous decades, the old fashion habits and plain cynicism prevents the average person from asserting their rights. All too often, when a local official approaches a local business owner regarding a safety issue or tax error, the business owner just pays the bribe rather than challenge the official. On the other hand, not only are most Western firms used to protecting their business interests, foreigners usually have better rights than the locals do. And if you succeed at making friends at high levels and your business is aligned with their interests, then you need to make sure this is understood from a public relations stand point. If the local tax inspectors perceive that your business has no “friends” then you will become vulnerable.
A Russian businessman once told me that he loved the cartoon Tom and Jerry. He explained that Tom represents the Russian bureaucracy and Jerry is the Russian business owner. The locals in all these countries have been playing the game of cat and mouse for generations and they know how to play it. If you follow the temptation to do in Rome as the Romans and just pay the officials off or cook books, they will get greedy and your business will be forever under their vassalage. Even if your local business friends advise you to play the game, don’t fall for it. The best ammunition against the crooked inspector is to follow the laws and regulations how ever daunting this task may seem.
Local Partners, Staff - Here is where you have to be careful. Often companies put all their eggs into one basket. They find a strong local partner who is well connected to the political elite and never have to worry about corruption. Once I worked with a client in a Central Asian country on a very important project. Our local partner had a strong and fruitful relationship with the government official responsible for making decisions. Everything went well, and after substantial investments were made, there was a government re-shuffling and before you knew it, a new official took his place. Despite contractual obligations and investments made, our partner was left powerless as a result. In countries with shifting power allegiances, this is an added risk factor and you should never rely on one person to connect you to the decision makers on the top. Here again, proper intelligence and due diligence from reliable resources and insurance can help reduce this risk.
Managing your local staff and facilities is also crucial. There is nothing worse than when you have invested in a local company, trained the staff and to find out they are selling your intellectual property on their own behalf or using their work hours to perform services using your equipment. This was probably the first form of corruption I personally faced when starting up my first company. Employee theft and internal corruption is not just a problem in the emerging markets. It is a problem everywhere in the world if not put in check. However, risks are much higher when much of your available human resources have grown to not trust the government, and as often is the case, they will not make a distinction between their employer and the state. Furthermore, memories of crooked oligarchs and unpaid back wages are still in the minds of many workers. As I mentioned earlier about my Russian friend’s analogy regarding Tom and Jerry, I prefer to have Tom represent the employer and Jerry, the local employee. I don’t know about you, but when it is my company we are talking about, I do not want to be Tom the foolish cat.
Depending on the local security services available or type of industry you are involved in, there are many ways to put proactive measures in place to help reduce this risk. The good news is, there is even more you can do to better manage your company. And with the proper leadership and training, you can remove that negative perception the employees have against the ownership of the company. If you take the time to know your local staff, study their culture and genuinely look after their interests, you will find that you have a very talented and honest team working on your behalf.
I also wish to emphasize that there is no magic wand to protect your business 100%, nor is there a perfect world in which to do business in. I could have and will cover more in the future on how dealing with legal, tax, management and other related issues as well. But like in all aspects of business, you minimize risk by planning for the worse, while realizing that greater the opportunity the greater the risk. If you understand this, you can solve this challenge and find a way to succeed.
Interested in implementing these solutions to reduce risk and corruption in your venture? Check out more articles in this blog or contact me. Whether you need some help with your existing operations or just need advice on planning your market entry strategy, email me at: andy.verich@missiondirectservices.com or Click here to learn more.
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For those of us who live and work in Russia, you get a much different perspective on corruption than what one would receive from the US media. Russia today is different than the Russia during the 1990′s. There are even considerable improvements since the Russia of five years ago. Below is a very interesting report from Laura Brank, Managing Partner, Moscow office (Head of Russia Practice) for Dechert LLP that I received from their mailing list:
