1. No category

Doing Business in Asia:
One Size Does Not Fit All
Jane W. Lu
[email protected]
Our agenda
• Asia’s economic environment
 Growth varies drastically across countries/industries
• Asia’s political environment
 Political risk
 Political hazard
• Weaknesses in institutional environment
 Uncertainty
 Corruption
 Counterfeiting
• Strategies to mitigate risks
A Taiwan
80%
B Korea
80%
60%
60%
Agriculture
Manufacturing
40%
40%
Service
Agriculture
20%
Manufacturing
20%
Service
0%
0%
1992
1995
1998
2001
2004
2007
2010
2013
C Singapore
100%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
D Hong Kong
100%
80%
80%
Agriculture
60%
Agriculture
60%
Manufacturing
Manufacturing
Service
40%
40%
20%
20%
0%
Service
0%
1985
1989
1993
1997
2001
2005
2009
2013
1997
1999
2001
2003
2005
2007
2009
2011
2013
GDP Composition
India
China
60%
60%
50%
50%
Agriculture
40%
Manufacturing
40%
Service
30%
30%
Agriculture
Manufacturing
20%
20%
10%
10%
0%
Service
0%
1985
1990
1995
2000
2005
2010
1978
1982
1986
1990
1994
1998
2002
2006
2010
More China…
25000
Industrial production
in RMB
Foods and textiles
20000
15000
10000
5000
0
1999 2000 2001 2002 2003 2005 2006 2007
25%
20%
15%
10%
Foods and textiles
5%
Industrial production
by % of mftg GDP
Machinery, automotives and
computers
0%
1999
2000
2001
2002
2003
2005
2006
2007
The political environment
• Pro-business policies
 Political risk - a subjective rating of the political environment
that can help assess where and when a firm might encounter
difficulties in managing the political environment.
• Policy uncertainty
 Political hazards - an objective measure which is based on
analysis of political institutions.
 A change in the political environment can come
from:
• Change in government party
• Change in party leadership
• Change in party preferences
Measurement of political risk
• Numerous agencies produce political risk rankings
– The Economist Intelligence Unit
– Euromoney
– The World Bank
• Rankings
– Based on surveys of knowledgeable individuals in a region
– Examples of countries with high political risk:
• Afghanistan, Burundi, Rwanda, Tajikistan and North Korea
– Examples of countries with low political risk:
• Norway, Switzerland, the United Kingdom and the United States
Political risk scores
Political Risk
Political Risk
Country
1992
2003
2010
Country
1992
2003
2010
Australia
18.4
23.5
26.7
Korea South
16.6
18.3
23.2
Bangladesh
5.3
9.1
12.4
Malaysia
15.3
16.7
20.0
Brunei
17.7
17.9
23.2
Mongolia
4.8
5.7
15.7
Cambodia
1.3
4.3
13.7
New Zealand
17.3
22.4
27.3
China
13.3
16.9
20.9
Pakistan
8.2
8.5
10.5
Hong Kong
16.2
19.9
25.7
Philippines
8.0
12.6
16.7
India
6.4
14.8
19.3
Singapore
18.0
23.3
26.2
Indonesia
12.6
6.9
16.4
Taiwan
17.3
21.1
24.1
Japan
20.0
21.5
26.3
Thailand
13.6
14.7
16.5
Korea North
3.2
0.0
6.0
Vietnam
5.5
11.1
17.5
Sources: Euromoney, “Nowhere to Lend to,” Euromoney, September 1992, pp. 65-72.
Euromoney, “Country Risk,” Euromoney, September 2003, pp. 286-296.
Euromoney. “Country Risk,” Euromoney, March 2010, pp. 118-121.
http://www.euromoneycountryrisk.com/
Low score = high political risk
Full score of political risk is 20, 25, 30 and
100 for 1992, 2003, and 2010 respectively.
Policy stability
• Based upon
– Stability of preferences of actors
– Ability of actors to enact policy change when preferences
change
• Political hazards (feasibility of policy change) emerges when:
– No, or few, political constraints
• What defines extent of political constraints?
– Preferences of actors in political system
– Number of political and judiciary levels in policy making process
• A measurement based on analysis of political institutions
Levels in a political system
Key Features
Executive
Level of
independence
 Act independently of
judiciary or not
Upper
Legislature
Lower
Legislature
Number of actors
 Number of effectively

Independent
Judiciary
Sub-national
Actor
independent levels
The higher the
number, the greater
the political
constraints, and the
lower the political
hazards
Preferences in a political
system
Key Feature
Liberal
Nationalistic
Level of alignment
 Actor preferences

Conservative
Socialist
similar or not
The less the
similarity, the greater
the political
constraints, and the
lower the political
hazards
Example 1:
High political hazards
Key Features
Executive
Only one Level
 No constraints
No opposition
 Change policy as
actor’s preferences
change
 Greater chance of
policy instability
 Uncertain environment
for foreign investors
Example of Political Hazards
Example 2:
High political hazards
Executive
Key Features
Multiple levels
 Potential for constraints
Upper
Legislature
Independent
Judiciary
No effective opposition
 Preferences aligned
 Executives preferences
match others
 Uncertain environment
for foreign investors
Example of Political Hazards
Example 3:
Moderate political hazards
Executive
Key Features
Multiple levels
 Potential for constraints
Upper
Legislature
Independent
Judiciary
Effective opposition
 Preferences not aligned
 More difficult to enact
policy change
 Less uncertain
environment for foreign
investors
Example of Political Hazards
Example 4:
Low political hazards
Executive
Upper
Legislature
Lower
Legislature
Independent
Judiciary
Sub-national
Actor
Key Features
Multiple Levels
 Potential for
constraints
Substantial
opposition
 Preferences not
aligned
 Certain environment
for foreign investors
 Has a status quo
bias
Example of Political Hazards
Political hazards scores
Political Risk
Political Risk
Country
1992
2002
2012
Country
1992
2002
2012
Australia
0.51
0.51
0.30
Korea South
0.52
0.76
0.56
Bangladesh
0.56
0.61
0.73
Malaysia
0.70
0.46
0.63
Brunei
1.00
1.00
1.00
Mongolia
0.80
0.93
0.65
Cambodia
1.00
1.00
0.72
New Zealand
0.75
0.52
0.55
China
1.00
1.00
1.00
Pakistan
0.54
1.00
0.79
Hong Kong
1.00
--
--
Philippines
0.83
0.46
0.64
India
0.41
0.59
0.79
Singapore
0.94
0.97
0.91
Indonesia
1.00
0.50
0.44
Taiwan
0.78
0.68
0.71
Japan
0.46
0.42
0.52
Thailand
1.00
0.49
0.59
Korea North
1.00
1.00
1.00
Vietnam
1.00
1.00
0.89
Source: Witold J. Henisz, POLCON Database ( http://www-management.wharton.upenn.edu/henisz/), 2013.
Low score = highly constrained thus
low political hazards
Lack of Political Constraints
• Hong Kong investors constructed toll roads
in Hebei
• Hebei provincial government closed down
tollgates
 Hebei government notified operators by telephone
 Then began dismantling toll booths
 HK business people asked why?
Response, cannot discuss it now.
Source: Delios, A., Beamish, P. W. & Lu, J. W. 2010. International Business: An Asia Pacific Perspective (2nd Edn). Pearson Education South Asia (Prentice Hall)
Other Weaknesses in Asia’s
Institutional Environment
• Costs of doing business in Asia can increase
– because information is difficult to come by
• The lack of transparency in the business environment and the political
system
– where legal systems do not promote strong
adherence to a nation’s set of laws
• Corruption
– when the intellectual property protection regime
in a country is weak
• Counterfeiting products
Acquisition Activity Worldwide
USD (Trillion)
1.2
0.8
0.4
0
1992
1995
1998
Year
Source: Singh, K. & Delios, A. 2005. Strategy for Success in Asia. Wiley: Singapore.
2001
2004
Acquisition Activity in Asia
0.12
USD (Trillion)
Acquisitions of Asian firms
Acquisitions by Asian firms
0.08
0.04
0
1992
1995
1998
Year
Source: Singh, K. & Delios, A. 2005. Strategy for Success in Asia. Wiley: Singapore.
2001
2004
Corruption
• Corruption: Abuse of public power for private
benefit usually in the form of bribery (in cash
or in kind)
• The correlation between the lack of
transparency and corruption is strong.
• The correlation between a high level of
corruption and a low level of economic
development is strong.
A corrupt world?
Still a corrupt world?
Source: http://www.transparency.org/cpi2014/results
IPR Protection
• Asia has a weak intellectual property rights regime.
• A consequence of weak IPR protection is the
proliferation of IP violation such as counterfeiting
products.
• In most Asian countries, currency counterfeiters
are severely punished, but other counterfeiters are
often count on doing business “as usual”.
Counterfeiting
• The spread of counterfeit goods has
become global in recent years.
• Different countries have developed
“distinct competences”.
• At present, China is the leader.
– $16 billion a year industry
– a wide range of products: apparel, auto parts, drugs,
DVDs, skin-care products, software, and toys
– Not only for domestic market but also for export
Protection of IP
Law of the Land - ShanZhai

Shoe Industry

New Balance
◦ Knock-offs made by its own supplier
 Discover after low priced New Balance shoes began
to show up in stores in U.S. and Australia
◦ Millions in legal fees in U.S. and China
 But still seeing knock-offs
◦ Also happened to:
 Pepsi, Yamaha Motor Corp., Unilever PLC, Cartier…
Why counterfeiting?
• Greed!
• Industry structure
– converge on industries with low entry
barriers
• Firm-specific resources
• Institutional environment
– the lack of an effective formal IPR regime
– the lack of enforcement
Strengthening of IPR laws
Political Strategy
 Understanding laws and regulations is not sufficient
 Understanding the generation and enforcement of laws
just as important
•
How are laws made and enforced and what political entities are
involved in the process?
 Where underlying institutions are weak, relationships fill
this institutional gap

Norms and standards supplant rules/laws, relationships help to
enforce property rights, contracts and laws
 Political strategy not just an additional element to a
business strategy
•
It is crucial to the business strategy
Group Affiliation and
FDI Restricted Location
Probability of Exit
5%
4%
3%
2%
1%
0%
Restricted Locations
Affiliated to Regional-Level Groups
Non-Restricted Locations
Not Affiliated to Groups
Group Affiliation and
FDI Restricted Industry
Probability of Exit
5%
4%
3%
2%
1%
0%
Restricted Industries
Affiliated to National-Level Groups
Non-Restricted Industries
Not Affiliated to Groups
Summary
 Asia has experienced tremendous economic developments
in the past 50 years.
 Developments vary across countries and industries.
• Changing face of competition
• Changing opportunity set
 The developments in institutional environment lags those in
economic environment
 Uncertainty
 Corruption
 Weak IPR protection
 A thorough knowledge of institutional environment in Asia
 A good foundation to interpreting opportunities/threats and
formulating strategies in doing business in Asia