Strategic Risks in doing Business with Communist Countries
Introduction
A large number of communist nations are among the emerging global markets that are experiencing tremendous economic growth spurred by foreign direct investment (FDI) attracted and incentivized by these communist nations. The best example is China whose economy has grown tremendously into a global economic power with large volumes of exportation. Strategic decisions to do business in communist countries emerge from the need to leverage on cheap labor, large emerging domestic markets, government subsidies, and a lax regulatory framework. Strategic management as a science and art used in formulation, implementation and evaluation of cross-functional decisions, which enable organizations to achieve their goals has been well utilized in informing these strategic decisions. However, success has not always been forthcoming for multinational corporations investing in these communist nations because of unprecedented strategic risks (Jayaraman, 2009). Strategy formulation is often informed by key internal and external factors. However, because there is consistency in internal factors within corporations, the external factors have been the major determinant of success in strategic moves within international areas of operation. Key external factors that influence strategic formulation include governments, the legal structure, culture, technology, economy, politics, demographics, and the social and physical environment. Naturally, these factors are dynamic in nature, and their dynamism has been increasing each day as globalization grows. This dynamism has been partly responsible for strategic risks that multinationals encounter in communist nations and markets. The dynamism of these factors is experienced even in developed, capitalist markets. However, it is manageable because of the stable environment in the developed markets and nations. On the other hand, the dynamism of these external factors in communist countries is erratic and unpredictable because of extreme instability in areas such as politics and legal regulations (Jayaraman, 2009). As such, multinationals in such communist nations have an extra risk to bear when formulating and implementing strategies.
Risk Assessment as a Strategy Risk
Risk assessment is often an important element in strategic management. Risks within the external operational environment have to be factored in during the generation of strategies, and implementation process. The inability to accurately or at least vaguely quantify a risk in the strategic processes presents a big challenge to the business in resource allocation (Donham & Charalambos, 2007). Investing in communist nations such as China and ex-soviet bloc countries, as well as most emerging economies is far riskier when compared to mature markets in developed capitalist nations and economies. Unlike the mature markets in the capitalist domain, these transition communist nations do not have a clear means by which involved risks in business ventures can be calculated, specified or even managed (Donham & Charalambos, 2007). In the communist nations, the rules of the game in business are neither transparent nor stable. Therefore, the normal procedures of risk taking, which outlines what business is about, are distorted by operations of incalculable, unpredictable, pervasive, and thus inherently unmanageable and uncontrollable risks (Donham & Charalambos, 2007). Lack of transparency and volatility coupled by the fact that western business entities cannot take for granted locals in most aspects as they would normally do in the western world, transforms from pervasive and elusive dangers to risk-inducing factors with an ability of concrete manifestation. In the end, the whole strategy formulation process gets negatively impacted because risks cannot be factored into the process, and thus increasing the risk of investing in such communist set ups (Donham & Charalambos, 2007).
Operational Practice Risks and Cultural Challenges
Operational practices and culture within developed western nations significantly differs from operational practices in communist countries. This is partly a result of differences in culture, and the operational environments. The western world and its developed markets have accumulated a significant body of knowledge and experience on how to foster strategic success in competitive market economies (Donham & Charalambos, 2007). As a means to achieve success in communist countries, most multinationals seek to employ the same western blue print in these communist nations. This however, requires the gaps between the locals and the westerners to be closed for a successful strategic implementation to be obtained. Therefore, the sooner locals in communist nations fit their ways into the western multinationals’ blueprints for success the faster success can be realized (Donham & Charalambos, 2007). However, in real perspective the culture and business environment in communist nations fundamentally differs from those in the west. As such, western principles of operation in sound strategic management become inoperative in such communist environment. It is in such cases that the western multinationals find that they have to adjust their tenets in business to the local communist mentality-“when in Rome do as the Romans do (Donham & Charalambos, 2007).” The evolution of this second maxim has been prompted by the westerners’ realization that their uncompromising stand on getting communists to abandon their local ways and adopt the western way has been counterproductive. Experience in management has often shown that western multinationals are often caught between the two paths and they tend to veer between fitting into the local ways and making the locals change. The result has been the adoption of either one or the other in ad hoc and haphazard manner resulting in inefficiency and confusion at most levels of strategic management. In the end, the differences in operational practices and culture add on to the strategic risks that western multinationals have to encounter and overcome if they are to succeed in communist countries.
Legal Risks
Strict laws, intellectual property (IP) rights, and strong legal institutions protect businesses in the western world. This partly stabilizes the operational environment and makes strategy formulation, implementation and resource allocation predictable (Jayaraman, 2009). On the contrary, the communist nations have loosely defined legal structures for business protection as well as poorly enforced regulations. According to Jansics (2012), nations such as the Slovakia and Czech Republic have very weak prosecution processes due to lack of strong legal institutions and negative political influence. It is the presence of such problems in communist nations that makes it difficult to protect businesses and their intellectual rights, and thus leading to losses. In other cases such as China, North Korea and Vietnam copyrights are not only inconsistently protected, but there is also prevalent and outright counterfeiting and piracy (Pierre, 2010). In fact, China as one of the communist nations has been cited as the world’s worst environment in terms of business intellectual property protection due to rife counterfeiting. This problem negates the business strategy of relocating to communist nations because of leveraging on their big markets because the markets are awash with counterfeited products. In strategic analysis, businesses evaluate their strong points internally and externally, and one of these strong points as can be revealed by any SWOT analysis would be intellectual property because of its uniqueness. Conventionally, multinationals have relied on their intellectual property as a strategic win, but this is rendered strategically impractical due to poor intellectual property protection. As such, some multinationals have realized that sometimes the IP strong point cannot be relied on strategically to support a business in communist nations. The outright piracy and counterfeiting is worsened by the fact that some communist nations such as China compel multinationals operating in their countries to surrender their sophisticated technology under the forced transfer policy, which is a requirement in some cases for licensure. This surrendering of technology to potential competitors in this communist nation threatens to create new competition through prototyping or outright patent infringements. In the end, the multinationals lose their competitive edge due to such policies. Navarro (2013) highlights examples of cases in which IP infringement has rendered some multinationals incompetent in communist nations. The first example is that of the search giant Google. Google was welcomed into China, however, since the nation was interested in seeing its own local companies succeed Google was hacked and its source code stolen (Navarro, 2013). This was later used to prop Baidu-a local Chinese business-that finally took over the search market in China. Unfortunately, no legal measures were taken! In some cases communist pirates not only infringe in IPs, but they also can take over a whole business. Navarro (2012), highlights a case in point whereby Chinese local partners took over Fellowes-a company that had hired a local Chinese company to produce for them paper shredders. These few cases show the height of impunity in communist nations, which does not guarantee any ethical values and protections for businesses. In essence, business strategy in such communist environments is made null and void.
Trade Policy Challenges and Geopolitical Risk
Currency manipulation, protectionist rules and abusive trade policies are just but a few among the negative tactics that communist nations such as China use in their trade relations with nations and multinationals from the west. China is notably notorious in imposing protectionist rules on most multinationals seeking to set up business in China (Navarro, 2013). For starters, corporations seeking to set up businesses in China are required to take a majority partner. This automatically dilutes the corporation’s control because local interests increase, and may easily tip the scales in favor of the communist party (Jayaraman, 2009; Hindery, 2012). Implementing strategic moves becomes subject to a lot of local influence due to this provision and the initial strategic goals of the investing corporation may be rendered unrealizable. Giving away a majority stake is further followed by the requirement to turn over processes and technologies to the Chinese partners. In the end, the investing company is stripped off its control on its strategic operations (Pierre, 2010). The turnover of technology is often followed by institution of research and development premises in the communist nations. This often gives the so called ‘partners’ an ability to even turn over the technology to other local firms. The outright trade tensions between China and the West-particularly the US-go just beyond trade and into the transformation of China into a military force capable of projecting military might all over the globe (Zakaria & Ian, 2006). This poses a geopolitical risk for multinationals operating in such a communist nation because of possible retaliatory policy measures if differences escalate (Hindery, 2012). In a nutshell, policies that are often a result of politics bring about negative impacts on strategic plans of most multinationals and thus making business in communist nations a nightmare.
References
Donham, B. W. & Charalambos, A, V. (2007). “Don’ts” and “Do’s”: Insights from Experience in Mitigating Risks of Western Investors in Post-communist Countries. Retrieved from http://www.hbs.edu/faculty/Publication%20Files/07-041.pdf
Hindery, L. (2012). China’s Latest Target in Its Trade War against American Manufacturing: The U.S. Solar Industry. Huff Post Business. Retrieved from http://www.huffingtonpost.com/leo-hindery-jr/china-solar-panels-_b_1323568.html
Jansics, D. Eric, L. Marek, S. & Stepan, Z. (2012). Corruption Risks in the Visegrad Countries: Visegrad Integrity System Study. Transparency International. Retrieved from http://www.transparency.cz/doc/aktuality/corruption_risks_in_visegrad_countries_full_report.pdf
Jayaraman, K. (2009). Doing business in China: A risk analysis. Journal of Emerging Knowledge on Emerging Markets, 1 (1), pp. 1-9
Navarro, P. (2013). China 2013: The Year of Reshoring to America? Retrieved from http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2013_01/Strategy-Viewpoint.aspx#axzz2fPNysoFm
Pierre, K. (2010). Is it worth it doing business in a communist country. Retrieved from http://kay-pierre.xomba.com/it_worth_it_doing_business_communist_country
Shen, Y. M. (2004). How to Do Business in China. Dorrance Publishing Company. Smithfield: St. Petersburg.
Zakaria, F. & Ian, B. (2006). Hedging Political Risk in China. Harvard Business Review. Retrieved from http://hbr.org/2006/11/hedging-political-risk-in-china/ar/1
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