Expanding a business into new international markets can be a complex challenge as companies grapple with differing regulations, wildly varying cultural norms, and must often communicate and market in multiple languages. Still, the rewards are legion – a much larger consumer population, exposure to new and innovative products and a diversification of overall risk as a firm moves away from a single market. The world is a large, dynamic place and massive growth (especially in the global middle class) is expected in Asia, the Middle East and Africa in the next decade.
What businesses quickly discover, however, is that much of what companies take for granted in the U.S. or UK as far as legal protections and transparency are weakened or entirely absent in the countries into which they might want to bring their business. How do companies determine where they can safely manufacture their products or source their goods? What tools are available to help judge this risk?
Every year, a plethora of global rankings are published by various organizations to help explain the relative risks and ease of investing in a given country. An alphabet soup of organizations from the OECD to WIPO as well as bodies such as the World Bank and companies like A.T. Kearney compile lists to rack and stack the various national markets. But there are other indices that are crucial to international business leaders and are usually overlooked as quants focus on comparing easily-identifiable statistics such as consumer spending habits or labor costs. The overlooked concerns of the rule of law and press freedom, however, determine the true cost and risk of an international investment, and a close examination of these will help companies to steer clear of serious pitfalls before committing time, energy and personnel to a new market.
The importance of a free press to business
In the last few years, the concept of a ‘free press’ has had a rough ride, especially in the United States, as political factions point fingers at what they see as partisan reporting, and other (unprofessional, unchecked) social media-based organization have started to dominate how many people get their news. However, professional investigative journalism is a crucial, irreplaceable ally to business investors. A free professional press is one of the most important tools to ensure transparency in a market. A great example of this is the exposure of Wirecard in Germany (and the Philippines) by intrepid Financial Times reporters. Despite both the firm’s auditor (EY) and the German government’s own watchdog failing to detect any problems, the FT reporters continued to dig into an apparent disconnect in Wirecard’s accounts and eventually exposed a billion dollar fraud which led to the firm’s collapse. In the absence of a free press, this fraud would not have been discovered. When you are working with foreign partners, the free press is a strong and critical ally on checking any sort of flagrant fraud and company shenanigans.
This important role in the press – monitoring governments and businesses for misconduct – is why the Reporters Without Borders (RSF) ‘World Press Freedom Index’ is a key component in assessing a foreign market and understanding what checks and balancespotential future business partners from these countries may face. The U.S. is ranked 45th and the UK 35th out of 180 countries, neither of which are particularly impressive, but at least give a baseline from which to start a comparative survey. Interested in doing business in Russia? Their ranking is 149th out of 180. China? 177th out of 180. Companies must think twice before engaging in business here, as a firm enters these countries without the helpful assistance of a free, inquisitive press to help identify and bring down fraud, bad practices, graft and other major concerns for businesses operating in the country. This is especially crucial for foreign businesses who are entering the market – everyone else who operates locally and is part of the system may already know through experience and word of mouth which companies are actually reliable and which are shell companies to support the money-laundering activities of the local elite. In the absence of a free press, a foreign company is on its own and operating at a significant disadvantage.
Corruption flourishes in the absence of scrutiny
Not surprisingly, the rankings of Transparency International’s Corruption Perceptions Index generally track along the same lines. Although they use different methodologies to establishing their rankings, corruption generally thrives in a country with limited or no press freedoms. The reasons for this are fairly obvious – with no investigative reporting or shaming in the press, officials and agencies are able to engage in corrupt activities with impunity. Even countries that attempt to ‘root out’ corruption with death sentences and criminal investigations have limited effectiveness. China, for example, embarked on a major anti-corruption campaign in 2012 that included the investigation of several political figures and could even carry the death penalty
but they still rank 80th out of 198 countries. The United Kingdom is ranked 12th in the most recent Index, the Unites States is ranked 23rd, and Russia is…137th. Denmark is number one. Their ranking in press freedom? 3rd after Norway and Finland. The connection between a free press and corruption is strong.
The rule of law is another crucial ally for foreign businesses
But one other ranking is crucial for businesses looking to expand into the international market. Although businesses may not want to turn to the law for assistance over an issue (contract dispute, violation of a non-disclosure agreement, intellectual property protections) at least it is a reliable option in the U.S. and the UK for companies that find themselves in a bind over certain business issues. America and the United Kingdom are comparatively litigious societies, and companies from these markets often think in terms of legal solutions (or resolutions) when facing a business problem. But what if there is no reliable legal system to turn to at all? Or what if the local legal system is subject to corruption or even governmental manipulation in favor of the ‘home team’ when a company is operating overseas? This is a substantial concern when working in the international arena, and they have a ranking for this issue as well – the World Justice Project’s Rule of Law Index. The rule of law is defined briefly as a legal system which is just, accountable, accessible and fosters an open government. The U.S. is ranked 21st and the UK is ranked 13th out of 128 countries. Russia and China come in at 94th and 88th respectively. Once again, the number one country is Denmark.
The chart (pictured) shows the relationship between these indices. For the sake ofcomparison, Brazil (BRA) and the Netherlands (NLD) have been added to the mix. The connection between the relative strength of press freedom and the rule of law with corruption is striking. The absence of a strong rule of law and professional free press clearly create conditions in which corruption will thrive. For business leaders, the key concern is risk – if they invest in a country with a weak rule of law and no press freedom (which has its own ESG concerns for stockholders) they are highly likely to face corruption concerns. The U.S. Department of Justice and the Security and Exchange Commission are very aware of this and focus the majority of their Foreign Corrupt Practices Act investigations into countries such as China, Brazil and Russia. Historical prosecution statistics for the UK Bribery Act are similar, with an additional focus on the Middle East and Africa.
Additionally, a company needs to weigh its legal concerns very carefully before investing in countries at the bottom end of the scales, as their ability to dispute business conflicts in court are dramatically weakened. Crucial intellectual property is at risk (as many have discovered to their dismay in China) and a company’s ability to rely on outside sources (such as the press) to vet and investigate potential partners or upcoming regulatory change drops for every point on the scale.
The smart (and safe) money is to locate key business components in countries where these issues are absent. International business is risky enough without the added burden of a corruption concern or loss of key technology. Chasing cost savings may look wise in the short term, but paying extra to work in a country free of corruption, with a robust professional press and strong legal system is the clear winner in the long-term. The playing field is substantially more level for foreign businesses that invest in countries such as the Netherlands or Denmark.
There is a price to pay in higher wages for local staff and potential corporate taxation, but one will be able to compete on fair terms, keep abreast of developments and revelations thanks to a free press and avoid the risk that the company will be pulled into a corruption scandal such as Brazil’s infamous ‘car wash’.
Beyond the obvious concerns of operating in these countries, there are secondary impacts that are important to consider – a location with a strong rule of law allows a business to (properly) influence the government and help avoid regulatory changes that may impact the company’s ability to compete on the local market. In the event of cybercrime or other related malfeasance, a foreign company can approach the local law authorities with confidence instead of trepidation. With a free press, companies can expect scrutiny of their actions, but also those of their suppliers and competitors as well as the government. Building a production facility in a country that has a miserable press freedom score and major corruption concerns will also invite stakeholder scrutiny from an ESG perspective. Investing in a country where these issues do not exist allows businesses to generally sidestep concerns over social and governance concerns. In the end, choosing where to do business is a numbers-based decision, but all too often, the number crunching does not look to secondary costs that come from ‘running to the bottom’ on these issues. A company is far better off paying a bit more to play on the level playing field that comes from a site that has press freedoms, positive rule of law and less corruption. The advantages far outweigh the price of admission.
Kirk Samson is the owner of Samson Atlantic LLC, a Chicago-based international business consulting company focused on market research and political risk assessment. Mr. Samson is a former U.S. diplomat and international law advisor.
