Culture Clash: Be Sure to Factor in Role of Governments

Editor’s note: “International Business Corner” is a weekly column written by Joan Keston that will be providing information for people involved in or considering international operations. Keston is an international business consultant. Over the next several months she will be writing about important issues that international businesses face as they compete in the 21st century global business environment. This article addresses the ease of doing business in developing countries.

RALEIGH – There are several factors that must be considered when analyzing foreign business cultures. This is important in determining which markets you wish to penetrate and in which country you establish your operations in order to penetrate a region.

“Doing Business” (see Web link) ranks economies on the ease of doing business. In addition to the overall ease category, it ranks economies in the following areas that directly affect doing business: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, closing a business. In general you find a higher rating for the ease of doing business in the industrialized and the more developed economies.

This website is a good place to start.

Liberalization

Many of the categories analyzed in Doing Business involve the role of the government in facilitating or impeding business. “Liberalization” is a term that I use to express the progression of the government of a developing country along a development spectrum. The ease of doing business in a country generally improves as the government adopts a more liberal attitude and facilitates, rather than impedes, doing business

Starting a Business / Closing a Business

Most American business people are familiar with the ease of creating a company to conduct business in a form that protects the individuals from liability and their personal assets from debts incurred by a company. This ease greatly facilitates the calculated risks that businesses can take, and thus greatly encourages creativity and progress. In addition, the costs of creating a company are minimal and capitalization requirements are not mandated by law; they are the result of financing considerations and actual market requirements. Closing a business is also relatively straight forward, and the bankruptcy of a company does not necessarily affect the owners or managers personally beyond the direct investment in the company. (Of course, managers and directors are responsible for any acts they have done or omitted to do in the exercise of their duties as imposed by legislation.)

This is not always the case in developing countries. Often the establishment of a company takes several months, with costs and capitalization requirements. This impedes the speed in which a venture can begin, and affects the risk calculation involved in determining whether to begin a venture. Closing a business can also drag on for several years and bankruptcy is not nearly as acceptable as in the US. Managers and directors may often be personally liable for the failure of businesses. Even if corporate structures are used to protect against personal liability, liability may be imposed on managers’ personal assets in the event of employee claims. The juridical system in many countries is very pro-labor and will attach personal assets even if legislation states otherwise.

Conducting a Business

All aspects of governmental involvement or mandates that affect the operations of your business should be considered in discussing the ease of doing business in a particular business culture, such as:

• Licensing
• Regulatory compliance
• Intellectual property protection
• Product or service registration
• Labor legislation and philosophy
• Protection for foreign investment
• Consumer legislation
• Product safety and standards legislation

Equally important is the record of the government in enforcing legislation.

Role of the Government

There are several questions to ask to better understand the role of the government, and whether or not it facilitates business:

• Is there a concept of Rule of Law?
• Is the government an impartial presence?
• Is there a market economy or is government directly involved?
• How low is the government ceiling?
• Is legislation equitably enforced?
• What is the tax burden? What is the fiscal condition?

In conclusion, the relative ease or complexity of doing business in a particular country will factor into the cost/benefit analysis of your venture. Employing the professionals to assist in the analysis and eventual execution of your endeavor is critical to its success.
Joan Keston has experience with mature as well as entrepreneurial companies, domestically and internationally, and with an executive managerial and legal background. She has a deep understanding of the business culture and issues involved in doing business in developing countries as well as Europe. She is the Managing Principal at Keston & Associates, Ltd., an international business consulting firm located in Raleigh, NC, and a Partner at Paladin and Associates, Inc. Her firm assists companies establish business operations throughout the world. She can be reached at (919) 881-7764.