Emerging markets carry high risk and high returns. In my work as a lawyer representing Western companies in emerging markets, I have concluded that there are four critical elements to emerging market success: good partner, open mind, active participation, and great patience.
I have seen enough essential similarities between countries as diverse as Russia, Korea (ten years ago when it was still an emerging market country), Vietnam, and even Gambia and Papua New Guinea, to believe that certain core generalizations apply to all or nearly all of them. all emerging market countries. Just as good concepts, strong markets, and good execution are required in all countries, so these four simple principles are the keys to success in emerging market countries.
PRINCIPLE ONE: A good partner is sine qua non from Success.
The quality of local partners is an indispensable element for the success of emerging markets. So where do you start?
Starting from feasibility test. Before doing business with anyone, you must first determine what you need from your partners in the particular country where you will do business. In my experience, foreign companies need local partners who are effective, cooperative, and (most importantly) trustworthy.
Emerging market countries almost always have legal systems that are not yet fully formed. Their laws are often government-oriented and far from free markets. Their trials were slow and often corrupt. Form takes precedence over substance in a way that is completely foreign to Westerners. One minor technical glitch on your part may take away your right to sue your partner for stealing all your money. It may even result in you and your company being kicked out of the country, while your assets remain.
Of course you should do your best to avoid technical errors, but the better strategy is to choose your partner well.
So what should you look for in a local partner? Political connection? Yes and no:
- Yes, because you may need someone with sufficient dexterity to maneuver around the often stifling business laws and bureaucracy that might try to cut your business at every turn.
- No, if you think that’s all you need. Just as in the West, politically connected people are usually more of a “government type” than a businessman. Partnering with someone in a developing country with whom you would never consider partnering in your home country is a mistake.
Political influence in emerging market countries is often more effective at avoiding legal liability for something like debt than in generating business revenue. I’ve seen many instances where a foreign company partnered with someone because he was “strict with the governor,” only to see the business destroyed by new governor as part of his house cleaning. The best partners are politically connected only to the extent necessary for business success.
Your spouse’s character and reputation is your protection in countries where the court system is not. Don’t partner every meaning of the term without conducting thorough due diligence.
Get to know your potential partner. If he’s legit and wants to work with you long term, he’ll expect you to want to get to know him better and not think about your wish to meet a few times before signing any deals.
Use every resource you have to find out about your potential partner. Check his references, especially those of other foreign companies he has worked with. Hire a local attorney or investigator to ensure that he and his various businesses are in good standing with all creditors and tax authorities. If your potential spouse is in Vladivostok, Russia or Qingdao, China, hiring a lawyer in Moscow or Shanghai may not be good enough. Find someone you can trust with contacts where your potential partner does business.
PRINCIPLE TWO: Keep an open mind. Assume None.
Doing business in an emerging market means not taking it for granted. I have a mantra for my own legal work in these countries that translates well to the business world: “Assume nothing, but assume that you assume something without realizing that you do.”
Things will be different. Very different. Things you take for granted in your home country may not exist in an emerging market country. What you take for granted in your home country may be quite the opposite in an emerging market country. Things that you think will be very different in an emerging market country may be exactly the same. What you think you know about emerging market countries based on what you know from other emerging market countries may be very different in neighboring countries, or even in other regions of the same country.
The principle, again: Keep an open mind, and don’t assume anything.
PRINCIPLE THREE: Participate in Everything.
In many emerging market countries, local businesses take advantage of corruption to evade compliance with the law. This might work for the locals, but it won’t work for you. The easiest way for a local competitor to kick you out is to do something illegal. Neither you nor your government will have good reason to complain if your rival closes your business because of your illegal activities. It may even be your own partner reporting you so he or she can take full ownership and control of your business.
You must have your own people in the field, leading, training, and instructing on business methods, business ethics, efficiency, and quality control, among others.
We have a saying in our law office that a day of face-to-face meetings with a local advisor is equivalent to a month of phone calls and emails when it comes to getting things done. This also applies in the business field.
PRINCIPLE FOUR: Exercise Extreme Patience.
This principle comes from the saying that everything takes twice as long as you think. If it takes twice as long in the West, three times as long in emerging market countries. You’ll be playing both a businessman and a teacher – and in both roles, your partner’s learning curve will almost certainly take more time to work through than you think.
For example, many emerging market countries have a history where “bad business” means “thinking long term.” A year or two after the fall of Soviet communism, I got involved in an issue where an investor put $250,000 into a Russian joint venture. Businesses very quickly make a lot of money and all indicators point to steadily increasing profitability. But, pretty quickly, the Russian company stole $250,000. Is it so irrational for him to think short-term in a country where the government and tax system have such a history of uncertainty?
Remember: It takes patience to induce a mindset change. Extreme patience.
EMERGING MARKET SUCCESS
Emerging markets cannot be approached with a quick kill mentality. Above all, emerging market success requires good partners, an open mind, a high level of participation, and a great deal of patience.
This is of course risky. It can also be very profitable.
