The New Rules Of Globalization 1k3y1r

Mapping the Global Landscape CEOs of multinationals must understand the ways in which governments in developing countries are redefining their interests and drawing up new policies to further them. At one extreme, sticking close to home may ensure lower political risk, but it could also mean ceding market share to global competitors. At the other extreme, pursuing a strategy without considering geopolitical dynamics could boost growth in the short term but heighten the risk that politics could fatally undermine business operations in the future. To factor globalization’s new risks into strategy, executives must ask two questions: Is our industry strategically important to the government of the country we wish to enter? Is our industry strategically important to our home government? Visualizing the answers in a two-by-two matrix can help a company determine its position on the globalization landscape. Two “no” answers place a company in the upper-right quadrant, where a globalization strategy generates little friction at home or abroad (à la Coke). Two “yes” answers land it in the lower-left quadrant, where national security concerns dominate its industry (Lockheed Martin’s reality). Map Your Industry To identify their globalization options, Western multinationals must assess the strategic importance of their industries at home and in the countries they wish to enter. For example, Western retailers may face challenges in India, where the industry is considered relatively strategic, even though it is not strategically important at home.

Divergent answers to the two questions indicate that the company must make some nuanced decisions; managers are likely to be exposed to political constraints and geopolitical maneuvering from host governments or at home. The company can use its understanding of how the host and home governments may prescribe its opportunities to develop the right approach. To avoid conflict, it could find ways to align its strategy with the prevailing

policies. It could offer only products that are of little interest to the state. The company could also decide to stay home.

Strategies to Manage Guarded Globalization The multinational corporations likely to be affected most by the changes in globalization must pinpoint strategies for managing the risks. The New Risks Governments monitor and dictate prices in key industries.

The government of the United Arab Emirates, eager to assure people that the staples of everyday life will remain affordable, sets price ceilings for manufacturers and retailers. Several consumer goods manufacturers, such as Unilever and Kraft, reported that some vendors stopped supplying them when state-imposed prices rendered their businesses unviable. Many emerging market governments, worried about the flow of information, keep tech companies under their thumb.

Edward Snowden’s accusation that U.S. intelligence officials use data gathered by tech companies to spy on s has helped the Chinese government justify efforts to protect consumers from American technology firms. Telecommunications is seen as a highly strategic industry.

In some Arab countries, technology providers must make available data that governments deem relevant for national security in return for market access. In 2010 the UAE and Saudi Arabia threatened Canadian firm Research in Motion (RIM) with a ban because they were unable to monitor messages sent on its BlackBerry Messenger system. Eventually, RIM negotiated an agreement with state-controlled telecom operators and government regulators. Many countries rely on the domestic banking system to finance budget deficits, so they fear deregulation will have a destabilizing effect.

In Indonesia, less than 30% of the country’s 240 million people have access to banks. Yet officials have pressured the central bank to restrict the activities of foreign banks, and new policies may require them to become locally incorporated entities. Politicians may try to use multinationals to promote personal agendas or to deflect public anger.

Foreign participation in India’s retail sector is highly politicized because of the large number of people employed in mom-and-pop stores. The government announced in 2011 that it would allow foreign investment in multibrand retailing, but a backlash forced a policy reversal a month later. In September 2012 the government did another backflip and opened up the sector. Fierce political opposition will intensify in 2014, an election year. Challenges to foreign companies can now come from state-backed investigative journalists.

A report filed in December 2012 by CCTV, China’s state-owned television network, claimed that chicken sold in China by Kentucky Fried Chicken was loaded with antibiotics. A public outcry reverberated through China’s social media, and in January 2013 KFC’s month-onmonth sales fell by more than 40%. Volkswagen, McDonald’s, and Carrefour have received

the same treatment, as have Mead Johnson, Danone, and Nestlé for allegedly fixing the price of baby formula. The developed world poses similar risks. Chinese companies often complain about the hurdles they face overseas.

Telecom giant Huawei’s bids to acquire U.S. companies 3Com in 2008 and 3Leaf Systems in 2011 were turned down. And when Shuanghui International, a Chinese food company, made a bid (which ultimately succeeded) for Smithfield Foods, U.S. politicians urged Congress’s Committee on Foreign Investment in the United States (CFIUS) to treat food supplies as “critical infrastructure” while evaluating the takeover. Read more Companies in industries that are strategically important to the home government can consider the following approaches:

Stay home. While the importance of keeping out of foreign countries is obvious for companies in the defense industry, the strategy is spreading to other sectors, such as retail, which has become politically sensitive in many emerging markets. If a company enters a strategic sector in a foreign country, it should develop a playbook that maps the policy changes that would force it to leave and describes the possible exit options.

Become more “strategic” at home. Some companies choose to boost their value to their home government instead of looking to create value abroad. They campaign for the state to view their sector or products as strategic so that they can keep out foreign competition or boost profits by striking a closer relationship with the government. Ever since allegations surfaced last year that the U.S. National Security Agency has been spying on Europeans, some French and German telecommunications companies have started emphasizing their strategic value to local governments and consumers. Two of ’s internet giants announced a project in August 2013 called EMail Made in , which automatically encrypts e-mail that goes through their servers. As Neelie Kroes, the vice president of the European Commission, explained recently, “If European cloud customers cannot trust the U.S. government…maybe they won’t trust U.S. cloud providers either….there are multibillion-euro consequences [of spying] for American companies.”

Use the state to fight other states. Some companies may have the means to use government-to-government relations to sort out problems. BP, which has operated in the United Arab Emirates since 1931, ran into trouble in 2012, when British politicians and officials publicly criticized the UAE for closing the offices of prodemocracy groups and arresting political activists. The dispute undoubtedly contributed to the July 2012 decision by the UAE government to exclude BP from the 2014 licensing round of the largest onshore oil concession.

During a damage-control trip to the UAE in November 2012, Britain’s prime minister, David Cameron, offered to dispatch RAF fighters to a base in Abu Dhabi—a sign that his government understood the threats that Iran posed to the UAE’s security and that it was willing to ignore public criticism of this offer of help. A month later, Abu Dhabi quietly invited BP to bid for another onshore oil concession. Such strategies will become more important as politicians capitalize on public resentment in order to score points at the expense of foreign companies. Companies in industries that are strategically important to host governments face a different set of challenges. Many of them have discovered that there’s no such thing as free market entry anymore. Choosing which carrot to offer the host government is what matters.

Strike alliances. Although t ventures haven’t been popular for some years, many companies will need to partner—and share profits—with local players in return for safe age. Partnerships can help in many industries. Consider movies. China has become too big a market for Western filmmakers to ignore, but the Chinese government allows a limited number of foreign films into the country every year; in 2012 it increased the number of foreign-made movies that could be shown on the mainland from 20 to 34. A partnership with a Chinese film company can help shed the foreign label. Cloud Atlas, a German-made movie, was launched as a locally produced movie in China because 20% of the funding came from local investors. Of course, when the product involves intellectual and artistic content, the state pays close attention. In China, the government ensures that all scripts for radio, film, and television contain messages that are in harmony with state directives and don’t “tempt the people’s degeneration.” Local investors can also help Western producers navigate the corridors of power. To overcome its many challenges in China, Pfizer is taking a three-pronged approach to alliances. It has teamed up with a local company, Zhejiang Hisun, to tap into low-cost manufacturing capabilities and a generic drugs portfolio. It has also allied with China’s town Pharmaceutical Group to extend its reach to hospitals in the countryside. And Pfizer has invested $50 million in Shanghai Pharmaceutical Industry, which has vast R&D capabilities. This strategy has helped Pfizer become the largest multinational pharmaceutical company in China.

Add value to the state. A single-product company must often find a new way to add value in the host country. Just a few years after entering China, IMAX volunteered to help China’s state-run media achieve global production values. It’s hard to imagine that Beijing doesn’t that assistance when deciding which foreign films can enter China and how many new theaters IMAX can open. Avatar, a movie in which IMAX was involved, was a huge success in the country. And IMAX has more than 150 theaters in China and another 400 in the works.

Become too diversified to fail. Many developing countries offer so many opportunities that a multibusiness strategy can be compelling for multinationals. GE, for example, has dozens of investments in China,

spanning different sectors and time horizons. In some instances, it is trading away its intellectual property; the company knows it can sell certain products in China only if it allows local partners to “adopt” its technologies. The company has no illusions: It makes new investments as old ones become less attractive. Even if alarm bells go off in one sector, or for a specific investment, constant diversification ensures that China remains one of GE’s most lucrative markets.

Build it so that you can stay. Fast-expanding sub-Saharan African countries such as Nigeria, Ghana, and Kenya, which continually deal with traffic congestion, blackouts, and other infrastructure failures, work hard to attract private investment into infrastructure sectors. (Nigeria has almost as many citizens as Brazil but produces just 5% as much electricity.) Many African governments have launched flagship projects with well-known foreign companies, which have aligned their operations to match government priorities. Public-private infrastructure partnerships usually adhere to the build-operate-transfer model, and so they generate profits for Western corporations only when projects require a level of technical expertise that local competitors can’t provide. Multinational companies would therefore do well to offer their best technologies in such partnerships.

Capitalize on state capitalism. Another useful strategy to withstand new levels of scrutiny by host states is to commit to hiring local workers and using local materials. In many emerging markets, that has already become a requirement. The Brazilian government expects large projects to source components from local producers as much as possible, and it favors domestic manufacturers in public procurement bids. In Africa, there are less stringent benchmarks for local jobs and sourcing, but countries across the continent want their citizens to share in the gains from foreign investment. A government’s skewed priorities can create business opportunities. Facing mounting social pressure to deal with China’s environmental crisis, Beijing announced in July 2013 that the energy efficiency sector would receive greater fiscal and political so that it could meet the country’s environmental goals. Foreign companies could enter China’s green technology sector, the new policy stipulated, only if domestic state-owned companies were allowed to absorb their technologies. However, the policy’s success will help the Chinese government stay in power, so it’s unlikely that the state will forget the foreign companies that invest—and those that don’t—in the industry.Anticipating risks in foreign markets and developing creative strategies to manage them will become increasingly important capabilities over the next decade. The pressures created by rapid social change and the failure of governments to keep pace with the demand for a more secure way of life and higher living standards help explain why protests over a commercial development in central Istanbul quickly became a national crisis in Turkey in 2013, and why a nine-cent bus fare hike in São Paulo sent a million angry Brazilians spilling into the streets across the country. Sure, multinational companies will continue to find opportunities for expansion and will face new obstacles to the sustainability of their investments. In this era of guarded globalization, however, both are likely to be moving targets that will require constant strategic adaptation.